Thanks for

Transcription

Thanks for

HSBC’s Guide to
Cash, Supply Chain and
Treasury Management
in Asia Pacific 2011
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Manager, Global Trade and Supply Chain, Payments and Cash Management, Asia Pacific, HSBC, Hong Kong.
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Contents
8
10
22
Foreword
Contributors
Treasury Associations in Asia Pacific
The New Economic Landscape
24
The New Norms of Financial Markets for Corporate Treasurers
Peter Wong, Founding Chairman and President, International Association of CFOs and Corporate Treasurers,
China and Convenor, Hong Kong Association of Corporate Treasurers
29
Building for Growth: Trends in Emerging Asia
Rohit De Rozario, Senior Vice President, and Chuen Yick Lam, Vice President, Markets Management, Global
Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Working Capital Management
36
Treasury Post-Noughties
David Blair, Vice President, Treasury, Huawei, China
41
Effective Cash Management: Key Factors in Addressing Business Liquidity
Ankita Tyagi, Research Associate, Financial Management and Governance, Risk and Compliance (GRC)
practice, Aberdeen Group, Boston, Massachusetts
45
A Pragmatic Look at Process Centralisation after the Global Financial Crisis
Anthony CK Ho, Vice President, and Mohammed Omer Murtza, Assistant Vice President, Product
Management, Payments and Receivables, Global Cash Management, Asia Pacific, HSBC, Hong Kong
50
Treasury: Business Process Outsourcing
Vipul Agrawal, IT Consultant, and Sumesh Gopurathingal, Business Analyst, ITC Infotech India Ltd, India
55
Factoring: The Smart Way to Fund?
Damian Glendinning, Vice President and Treasurer, Lenovo; President, Association of Corporate Treasurers,
Singapore
61
Forfaiting: A Solution for Volatile Times
Vin Sing Chay, Director of Business Development, Asia Forfaiting Centre, Trade and Supply Chain, HSBC,
Singapore
65
Payments STP: A Business Imperative
Arthur Tanseco, Vice President and Sarfaraz Ahmad, Vice President, Regional Product Management, Global
70
Streamlined Collections for Optimised Working Capital
Jemmy Ong, Senior Vice President, Global Transaction Services, Institutional Banking Group, DBS, Singapore
75
The Beneficial World of Virtual Accounts
Ma-an David, Assistant Vice President, Product Management, Global Payments and Cash Management,
Asia Pacific, HSBC, Hong Kong; and Wendel Kwan, Assistant Vice President, Product Management, Global
Supply Chain Management
84
Global Trade Management: A Key Import-Export Strategy
Keith Ip, Director, Value Chain Management Solutions, Greater China, Oracle, Hong Kong
89
Towards a Solution: A Focused Approach to Supply Chain Finance
Alexander Malaket, President, OPUS Advisory Services International
94
Linking the Physical and Financial Supply Chains: Internal and External Challenges
Carl Wegner, Head, Transaction Banking, Standard Chartered Bank, Taiwan
4 HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia Pacific 2011
Contents
98
Tax-Effective Supply Chain Management in China
Becky Lai, Partner, International Tax Services Leader – Greater China, based in Ernst & Young, Hong Kong;
Andrew Choy, International Tax Services Partner, Ernst & Young, Beijing, China; and Travis Qiu, Partner,
Transfer Pricing and Tax Effective Supply Chain Management, Ernst & Young, Shanghai, China
105
Green Supply Chain Management: Considerations for CFOs
Steve Keifer, Vice President of Industry and Product Marketing, GXS, Washington DC
The Power Of Technology
112
The Changing World of Payment Channels
Anand Mukati, Senior Vice President, Client Integration & eDelivery, Asia Pacific, HSBC, Hong Kong
117
Mobile Banking for the Corporate Treasury
Krishna K Ayyalasomayajula, Associate Engagement Manager, Banking and Capital Markets Practice, Infosys
Technologies Ltd; Yogesh P Mishra, Senior Principal, Infosys Consulting; and Shaji Farooq, Vice President
and Head of Banking and Capital Markets Practice, Infosys Technologies Ltd, US
122
SWIFT for Corporates: What’s Next?
Caroline Lacocque, Head of Client Integration Consulting, Global Transaction Banking, Asia Pacific, HSBC,
Hong Kong
126
Financial Risk Management in a Hong Kong Corporate Treasury
David Woo Kar Wai, General Manager, Corporate Treasury, Hysan Development Co. Ltd
132
Collaborating to Improve Customer Connectivity
Charles Henry Dubarry de Lassale, Head of Direct Channels and Integration, Global Transaction Banking,
HSBC Bank plc, UK; David Campbell, HSBC SAP Global Account Executive, SAP UK; and Michael King,
Global Client Director for HSBC, SWIFT
Unlocking Asia’s Potential
140
Acquainted Again: Middle Kingdom and the Middle East
As printed in Week in China
145
A Changing Approach in Asia
Mahesh Kini, Head of Cash Management Corporates, Asia Pacific, Deutsche Bank
149
Brazilian Commodities Fuel Boom in Ties with China and Asia
Paulo Silva, Manager, Structured Trade Finance, and Eric Striegler, Head, Trade & International, HSBC, Brazil
155
China’s Changing Priorities: Focus Shifts to Domestic Trade
Christopher G Lewis, Head of Trade and Supply Chain, Greater China, HSBC, China
160
China: Issues to Consider Before Investing
Ian Lewis, Partner, Mayer Brown JSM, Beijing, China
165
Renminbi Liberalisation: Timeline Compression?
Ben Chan, Senior Vice President, Strategy, Propositions & Channels, Commercial Banking, Asia Pacific,
HSBC, Hong Kong
Perspectives
170
Forming a New Partnership: Banks as Your Change Agent
Marcus Treacher, Head of Client Experience, Global Transaction Banking, HSBC Bank plc, UK
176
Banks and Treasuries: 10 Steps to a True Partnership
Violet Yung, Vice President Regional Sales, Global Payments and Cash Management, Asia Pacific, HSBC,
Hong Kong
Contents
180
Streamlining Standards and Processes Across a Large Organisation
Catherine Yu, Asia Pacific Regional Controller, British Telecom Global Services; Bonnie YK Chiu, Senior Vice
President, Regional Sales, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong; and
Kay Huang, Senior Vice President, Client Implementation, Global Payments and Cash Management, Asia
Pacific, HSBC, Hong Kong
186
Foundations for Liquidity Management
Jonathan Logan, Assistant Group Treasurer, Smith & Nephew
190
It Is Your Business To Know Your Banker’s Bank
Nolan S Adarve, Senior Vice President, Regional High Value Payments and FI Payments and Clearing,
Product Management, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
195
The Benefits of Bilateral Banking
Aman Dalal, Vice President, Product Management, Trade and Supply Chain, HSBC, India
199
Out of Japan: Supporting Overseas Expansion with a Regional Treasury Centre
Kiyono Hasaka, Vice President, Regional Sales, Global Payments and Cash Management, HSBC, Singapore
205
Japan’s Corporate Culture: The Challenges for Regional Treasurers
Jun Takane, Vice President, Sales, Global Payments and Cash Management, HSBC, Japan
Market Analysis
211
214
217
219
227
231
236
240
244
248
251
255
259
262
265
269
273
277
281
Australia
Bangladesh
Brunei
China
Hong Kong SAR
India
Indonesia
Japan
Korea
Macau SAR
Malaysia
Mauritius
New Zealand
The Philippines
Singapore
Sri Lanka
Taiwan
Thailand
Vietnam
This year barcodes have been added for easy access to additional reference material.
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HSBC’s Guide to Cash, Supply Chain and Treasury Management in Asia Pacific 2011 7
Foreword
Welcome to the 14th edition of HSBC’s Guide to Cash, Supply Chain and Treasury Management in
Asia Pacific, which this year incorporates a new layout. The Guide provides a trusted resource for
professionals in these three disciplines, with valuable editorial contributions from recognised experts on
industry best practice and innovation.
The main theme from my foreword to last year’s Guide remains equally true today – “much has changed
over the past year”. One of the most striking of these changes has been the growing global awareness
that conventional wisdom about the interaction of economic regions may no longer be valid. The
traditional assumption that emerging markets are dependent upon consumption in OECD countries for
their growth now looks increasingly obsolete.
The most compelling evidence for this lies in trade figures that highlight the way that these countries
have quickly responded to stagnation in their traditional markets by boosting trade activity among
themselves; referring to “emerging markets” as the world’s “faster growing economies” may therefore
better describe their status in and contribution to the global economy going forward.
This situation is also strongly reflected in forward-looking trade statistics. Since its launch in 2009,
HSBC’s Trade Confidence Index has consistently demonstrated that these faster growing economies
(and Asian ones in particular) have been the most optimistic about their future trade prospects – often
by a very significant margin. This trend is reflected in this issue of the Guide, which includes a variety of
articles that address topics relating to this shift in global economic activity. We hope that you will find
these and the many other articles and resources in the Guide a valuable reference and of assistance
to you in unlocking the potential of Asia Pacific. As always, we welcome your comments and any
suggestions you may have for the 2012 edition of the Guide.
Finally, I would like to extend my sincere thanks to the clients, cash management practitioners and
treasury professionals whose insightful and expert contributions made this Guide possible.
John Laurens
Head of Global Payments and Cash Management, Asia Pacific, HSBC
Tel: (852) 2822 2860
E-mail: [email protected]
Contributors
Vipul Agrawal
IT Consultant, ITC Infotech India Ltd., India
Vipul Agrawal joined ITC InfoTech India Ltd. in July 2008 and works for the BFSI cluster of the
organisation. He is responsible for managing a team of banking domain consultants for ITC Infotech’s
biggest client. Prior to this, he was part of the Global Payments and Cash Management product team
at HSBC, India. He has also worked on the commercial and retail lending systems of European and US
banks. He has more than nine years of experience and has worked for some of India’s top software
companies. He gained a Master’s degree in Business Administration from Symbiosis India.
Sarfaraz Ahmad
Vice President, Regional Product Management, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Sarfaraz Ahmad is a member of HSBC’s regional product management team responsible for high value
payments and receivables. He has close to 10 years of experience in banking, technology, and FMCG
sectors and in functional areas of finance, operations, supply chain, and technology services. Prior to
joining HSBC, he worked for Procter & Gamble and Hewlett-Packard. Mr Ahmad holds a Master’s
degree in Electrical Engineering and an MBA in Finance from the National University of Singapore.
Nolan S Adarve
Senior Vice President, Regional High Value Payments and FI Payments and Clearing, Product Management, Global
Nolan S Adarve is responsible for High Value Payments and FI Payments and Clearing across 20 markets
in Asia Pacific. His 15 years in cash management are supported by his strong experience in running
cash management business and product management as well as his familiarity in the diverse payments
infrastructures operating across Asia Pacific. Mr Adarve has been a member since 2004 of the SWIFT
Payments Maintenance Working Group. He was also a member of the ISO Payments Standards
Evaluation Group that harmonised the ISO 20022 Universal Financial Message Scheme in 2006.
Krishna K Ayyalasomayajula
Associate Engagement Manager, Banking and Capital Markets Practice, Infosys Technologies Ltd., US
Krishna K Ayyalasomayajula is an Associate Engagement Manager with Infosys. He manages Infosys
engagements in the treasury and payments portfolio for a large US bank. He is a Certified Treasury
Professional and focused on core banking transformation initiatives for corporate banking and treasury.
David Blair
Vice President, Treasury, Huawei, China
David Blair has 25 years of treasury experience, starting his career with Price Waterhouse, then
founding ABB’s World Treasury Centre in Switzerland. After setting up Nokia’s global treasury centre
in Switzerland, he set up Nokia Treasury Asia in Singapore before becoming Nokia Group Treasurer in
Finland. He is now Vice President, Treasury, at Huawei in China.
David Campbell
HSBC SAP Global Account Director, SAP UK
David Campbell is Global Account Director, SAP and has global responsibility for managing the HSBC
account. He has over 25 years of experience in the financial service sector. Prior to joining SAP, he
held a number of senior management positions in American Express, Visa and NatWest Bank and also
held a board position of a Nasdaq quoted company serving as Sales and Marketing Director. His main
responsibilities have involved accountability for direct sales, marketing, business partner sales and
strategic alliances. His main areas of expertise lie in credit risk, fraud management, commercial cards
and banking strategy.
Contributors
Ben Chan
Senior Vice President, Strategy, Propositions & Channels, Commercial Banking, Asia Pacific, HSBC, Hong Kong
Ben Chan is Senior Vice President, Business Planning and Strategy in HSBC, primarily responsible
for the development of the bank’s offshore RMB business. He has been engaged in the RMB Trade
Settlement Project since early 2009. He has served as the Deputy Chair of the Hong Kong Association
of Banks RMB Trade Settlement Committee. He maintains regular contacts with the regulators in Hong
Kong and mainland China. He is also driving the international RMB business in overseas offices of HSBC.
Since joining HSBC in 1996, he has held a number of positions in Corporate Banking, SME Banking,
Trade Services and Retail Banking. He completed his MBA at INSEAD, France, where he graduated with
Distinction. He is also an Associate of the Hong Kong Institute of Bankers. In addition, he serves as a
Government Appointed Member of the Public Affairs Forum.
Vin Sing Chay
Director of Business Development, Asia Forfaiting Centre, Trade and Supply Chain, HSBC, Singapore
Vin Sing Chay has worked in the banking industry for more than 17 years. For the last 12 years he has
worked for HSBC. He is responsible for originating forfaiting business in South and South East Asia.
Bonnie Y K CHIU
Senior Vice President, Regional Sales, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Responsible for providing consultative cash management solutions and advice to clients in diversified
industrial, resource and energy sectors, Bonnie Chiu brings a strong understanding of the challenges
faced by industry clients and a thorough understanding of the Asian market landscape and operating
environment. She also served as Vice President, Regional Sales, with HSBC from 2002 to 2005,
responsible for promoting regional cash management solutions. Prior to that, she was Relationship
Manager, Commercial Banking, for five years, managing a lending portfolio of mid-cap corporate
clients in Hong Kong. Ms Chiu holds an MA from the University of Cambridge and an LLB from the
University of London, as well as the Association of Corporate Treasurers’ Certificate in International Cash
Management.
Andrew Choy
Partner, Ernst & Young, Beijing, China
Andrew Choy is a China tax partner in Ernst & Young’s Beijing office. He recently finished a twoyear secondment to the firm’s New York office, where he led the China tax desk. He specialises in
structuring cross-border transactions and pre-acquisition tax analysis for PRC investing clients. He has
extensive knowledge of post-acquisition restructuring and integration for multinational companies. He
was previously based in Hong Kong and moved to Beijing in 2004. He obtained his Bachelor of Business
Administration from the University of Washington, US, and is a member of the Washington State Board
of Accountants.
Aman Dalal
Vice President, Product Management, Trade and Supply Chain, HSBC, India
Aman Dalal has more than nine years of experience with HSBC and Standard Chartered Bank, handling
various functions and responsibilities in trade and supply chain, payments and cash management and
finance related areas, among other roles. He is a Chartered Accountant by profession and graduated
from MLS University, Rajasthan, India.
Contributors
Ma-an David
Assistant Vice President, Product Management, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Ma-an David has nearly 12 years of experience in cash management, working in various areas including
product management, business implementation, client service and operations. She is currently a
member of the Payment and Receivables Solutions team for Asia Pacific. Prior to HSBC, she worked for
two local banks in the Philippines. Ms David holds a Bachelor’s degree in Management Economics from
the Ateneo de Manila University.
Rohit De Rozario
Senior Vice President, Market Development, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Rohit De Rozario has more than 12 years of banking and consulting experience, covering business
strategy, mergers and acquisitions, human resources, cash management, marketing and analytics across
Asia Pacific and the Middle East. He joined HSBC in 2004 and has managed markets management and
business planning for payments and cash management in Asia Pacific. Prior to that, he gained extensive
experience with Arthur Andersen, where he was a senior consultant in the Middle East. He is an
engineer with a post graduate qualification in Management.
Charles Henry Dubarry de Lassale
Head of Direct Channels and Integration, Global Transaction Banking, HSBC Bank plc, UK
Based in London, Charles Henry Dubarry de Lassale is head of Direct Channels and Integration for
HSBC’s Global Transaction Banking business. He is responsible for host-to-host and SWIFT connectivity
and complements the client integration process and packaging of end-to-end solutions.
Shaji Farooq
Vice President and Head of Banking and Capital Markets Practice, Infosys Technologies Ltd., US
Shaji Farooq is Vice President and Head of the Banking and Capital Markets Practice at Infosys
Technologies Ltd. He has over 22 years of professional experience. His areas of expertise include
business and IT strategy, business process redesign and value management, with significant focus on
the financial services industry.
Damian Glendinning
Vice President and Treasurer, Lenovo; President, Association of Corporate Treasurers, Singapore
After 21 years with IBM, Damian Glendinning joined Lenovo in 2005 as Group Treasurer, following the
acquisition of IBM’s personal computer business. He had spent four years as IBM’s Asia Pacific treasurer
in Singapore, and was their Director of Global Treasury Operations in New York. Mr Glendinning is a
member of the ACCA, and has a degree in French and Italian from Oxford University. He has been
President of the Association of Corporate Treasurers (Singapore) since June 2010 – a position he also
held from 1999 to 2003.
Sumesh Gopurathingal
Business Analyst, ITC Infotech India Ltd., India
Sumesh Gopurathingal currently works as a business analyst with ITC Infotech India Ltd in their BFSI
vertical. He holds an MBA degree in Finance from S P Jain Center of Management. He is also a Certified
Associate of the Indian Institute of Bankers. Prior to his MBA, he worked with a leading public sector
bank in India. During his tenure with the bank he gained extensive experience in the areas of retail
banking operations and payments systems, including direct debits, credit transfers, cheque clearing and
RTGS and cash management services.
Contributors
Kiyono Hasaka
Vice President, Regional Sales, Global Payments and Cash Management, HSBC, Singapore
Kiyono Hasaka has more than 11 years of experience in cash and treasury management. She is currently
responsible for promoting HSBC’s payments and cash management solutions in the Asia Pacific region.
Prior to HSBC, she worked for Bank of America’s Global Treasury Services in Tokyo and Singapore,
and Bank of Tokyo-Mitsubishi in Singapore. She holds a Bachelor’s degree in Social Science from City
University, UK, and an MBA from Deakin University, Australia.
Anthony CK Ho
Vice President, Product Management, Payments and Receivables, Global Cash Management, Asia Pacific, HSBC, Hong Kong
Anthony Ho joined HSBC in 2006 as a Regional Payments and Receivables Product Manager. Prior to
moving into banking, he was with Accenture and Unisys, servicing the financial services sector. During
his time with Unisys, he was a key member in supporting the rollout of the Cheque Truncation Project
for Hong Kong Interbank Clearing Limited (HKICL). He holds an MBA from Hong Kong Polytechnic
University.
Kay Huang
Senior Vice President, Client Implementation, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Kay Huang has been a banker for over four years in Payments and Cash Management at HSBC. She
is responsible for leading and managing the implementation of domestic, regional and global cash
management solutions for HSBC’s corporate and financial institutional customers around the world.
She is experienced in leading and delivering global cash management solutions to a wide array of
customers. Previously, she worked for LG Philips Displays International Limited as an audit manager,
planning and performing reviews on business processes and IT controls for complex, high-risk sites
worldwide. She has also held consultancy positions with Oracle Systems HK Ltd and Deloitte & Touche.
She holds a Master of Business Administration from the Chinese University of Hong Kong and a degree
in Mathematics from the University of Hong Kong. She also holds the Certificate of International Cash
Management from the Association of Corporate Treasurers, UK.
Keith Ip
Director, Value Chain Management Solutions, Greater China, Oracle, Hong Kong
Keith Ip is Sales Director of Value Chain Management (VCM) Solutions for Oracle Greater China. He
leads a team of specialists in providing value chain and global trade business consultation to companies
across different industries in the Greater China region. In his previous careers, Mr Ip drove high-profile
supply chain initiatives and provided business consultation for Fortune 500 companies including Hewlett
Packard and Boeing in the US. He holds Executive MBAs from Kellogg School of Management,
Northwestern University and Hong Kong University of Science & Technology. He also holds a Master
of Science degree from Stanford University and a Bachelor of Science degree with honours from the
University of California, Berkeley.
Steve Keifer
Vice President of Industry and Product Marketing, GXS, Washington DC
Steve Keifer is the Vice President of Industry and Product Marketing for GXS, based in Washington DC.
Steve leads the global strategy and marketing for GXS’ vertical industry programmes in the automotive,
high tech, consumer products and financial services sectors. In recent years, he has spearheaded
multiple initiatives to build awareness of the benefits of B2B e-commerce to ERP project success,
emerging markets growth and corporate sustainability programmes. He maintains a popular blog entitled
EDInomics (http://blogs.gxs.com/keifers) in which he discusses news, trends and strategies for B2B in
the physical and financial supply chains.
Contributors
Michael King
Global Client Director for HSBC, SWIFT.
Michael King is SWIFT’s Global Client Director for HSBC. In this role, he is responsible for representing
HSBC’s interests into SWIFT and SWIFT’s interests into HSBC. Prior to assuming his current role,
he was Regional Director for UK and Ireland. In this role, he was responsible for SWIFT’s sales and
marketing activities in the region and maintaining senior relationships within member firms and
appropriate industry groups. Before his current role, he was Director e-commerce, responsible for
delivering SWIFT’s e-commerce portfolio. Prior to this, he held the positions of Regional Director for
SWIFT’s North America operations and Regional Director for the Asia Pacific business operations based
in Singapore and Hong Kong. He has more than 30 years of experience in the international finance arena.
Before joining SWIFT, he held various roles with a global bank and previously had his own company.
Mahesh Kini
Head of Cash Management Corporates, Asia Pacific, Deutsche Bank
As Head of Cash Management Corporates, Asia Pacific, Mahesh Kini is primarily responsible for the
sales, business management and strategy for cash management in the region. He is also responsible
for building the regional cash management corporates portfolio. He first joined the bank in 2007 as
Head of Cash Management Corporates, Singapore. Prior to joining Deutsche Bank AG, he held different
roles in cash management sales and product management at HSBC in Singapore. With over 15 years of
structuring regional and in-country cash management solutions, he has taken on various sales positions
in financial institutions, including ABN AMRO Bank and Bank of America. He first started his career
as a senior officer in cash management sales at HDFC Bank, India. He holds a Master’s degree in
Management Studies and a Bachelor of Commerce from Mumbai University, India.
Wendel Kwan
Assistant Vice President, Product Management, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Wendel Kwan is part of HSBC’s regional payments and receivables team for Asia Pacific, managing
mainly the business and development of regional collection platforms. Prior to joining HSBC, he worked
as an auditor in one of the big four firms. He is a Certified Public Accountant and holds a Bachelor’s
degree from the London School of Economics.
Caroline Lacocque
Head of Client Integration Consulting, Global Transaction Banking, Asia Pacific, HSBC, Hong Kong
Based in Hong Kong, Caroline Lacocque’s role is to develop HSBC’s global leadership position in the
corporate connectivity field, with a particular focus on SWIFT-based solutions, providing strategic advice
for key emerging multinational clients in Asia on their integration projects. Before joining HSBC, she was
Head of Corporates at SWIFT and responsible for successfully rolling out the corporate offering in Asia
Pacific. Prior to that, she was based in New York with the Treasury and Cash Management division of
SunGard, where she was responsible for introducing new cash and treasury solutions to Fortune 2000
customers. She is a Belgian citizen and holds a Master’s degree in International Law from the University
of Brussels, Belgium.
Contributors
Becky Lai
Partner, International Tax Services Leader – Greater China, based in Ernst & Young, Hong Kong.
Becky Lai has over 25 years of experience in tax advisory gained in Hong Kong, Toronto, and Beijing.
She concentrates on international tax for inbound and outbound tax structuring and financing. She
has extensive experience in manufacturing, financial services, energy and resources, media and
communications. She maintains frequent dialogues with the tax authorities on new trends in tax
development. She is a council member of the Taxation Institute in Hong Kong, a member of the Hong
Kong Institute of Certified Accountants, the Certified General Accountants of Canada and the American
Institute of Certified Accountants.
Chuen Yick Lam
Vice President, Markets Management, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Chuen Yick Lam joined HSBC’s business transformation team in 2002 and has worked with the Personal
Finance, Corporate Banking, and Global Markets businesses. His role extends over business planning,
front office support, and product development. Currently he is a member of the business planning team
for Payments and Cash Management in Asia Pacific. He received his MBA degree from the University of
Hong Kong in 2006.
John Laurens
Head of Global Payments and Cash Management, Asia Pacific, HSBC
John Laurens has more than 23 years of banking experience, covering cash management, relationship
management, sales, structured finance, operations and product management in Europe and Asia Pacific.
He joined HSBC in 2001 as the Regional Head of Product Management and led the development and
management of HSBC’s integrated cash management solutions throughout the region. Prior to that, he
gained extensive experience with Citibank, where he was the Head of Corporate Banking in Australia.
Mr Laurens is an Associate of the Chartered Institute of Bankers.
Christopher G Lewis
Head of Trade and Supply Chain, Greater China, HSBC, China
Christopher Lewis joined HSBC in 1989 and has since worked in a number of lending and trade
management positions in North America, Asia Pacific and the Middle East. Previously, he was
responsible for HSBC’s transaction banking businesses across the Middle East region. In his current
position, Mr Lewis is responsible for the bank’s trade business in Hong Kong and has functional
responsibility for HSBC Trade and Supply Chain delivery teams across China, Taiwan and Macau.
He holds a degree in Economics from the University of California and is Secretary of the Executive
Committee of the International Chamber of Commerce, Hong Kong.
Ian Lewis
Partner, Mayer Brown JSM, Beijing, China
Ian Lewis has more than 22 years of legal experience gained in several Asian jurisdictions, with
significant China real estate and commercial law experience. He has undertaken a range of projects
throughout the region and has previously worked in Hong Kong, Thailand and Vietnam. Based in Beijing
for the last nine years, he has undertaken a variety of work in China relating to foreign inward investment.
He is a regular conference speaker on real estate and foreign direct investment topics.
Jonathan Logan
Assistant Group Treasurer, Smith & Nephew
Jonathan Logan qualified as an accountant with PwC. He then initially joined GlaxoSmithKline’s internal
audit function before moving on to Treasury and finally Corporate Development. After eight years with
GlaxoSmithKline, he joined Smith & Nephew’s Treasury function in 2007 in his current role as Assistant
Group Treasurer.
Contributors
Alexander Malaket
President, OPUS Advisory Services International
Alexander Malaket is an internationally recognised consultant in trade finance, with more than 18
years in trade banking and trade advisory roles. He has been engaged by top-tier trade banks, financial
services clients and government agencies on assignments covering strategy, business process
analysis, technology implementations and project management. Mr Malaket holds a Bachelor’s degree
in Economics and Political Science from the University of Toronto and the designation of Certified
International Trade Professional from the Forum for International Trade Training, Canada.
Yogesh P Mishra
Senior Principal, Infosys Consulting, US
Yogesh P Mishra is a Senior Principal with Infosys Consulting. He is focused on developing and delivering
consulting solutions on customer innovation and multi-channel integration for the financial services
industry. He has an MBA in Finance from the Indian Institute of Management and ESADE Barcelona.
Anand Mukati
Senior Vice President, Client Integration & eDelivery, Asia Pacific, HSBC, Hong Kong
Anand Mukati has over 10 years of varied experience including technology sales, corporate planning,
consulting and business improvement. He is a certified Six Sigma Black Belt and has considerable
experience in driving offshore transformations. In his current role with Global Payments and Cash
Management, he heads the Client Integration and eDelivery team responsible for technology consulting
and execution for customers.
Mohammed Omer Murtza
Assistant Vice President, Product Management, Payments and Receivables, Global Cash Management, Asia Pacific, HSBC,
Hong Kong
Mohammed Omer Murtza has nearly 10 years of experience in cash management and supply chain
finance and in his current role is managing low value commercial payments and receivables products
for Asia Pacific countries. Prior to HSBC, he worked with Standard Chartered Bank in a supply chain
finance role and Deutsche Bank in a sales role. He has an MBA in Finance from the Institute of Business
Administration, Karachi, Pakistan.
Jemmy Ong
Senior Vice President, Global Transaction Services, Institutional Banking Group, DBS, Singapore
Jemmy Ong joined DBS in 2005 and is currently leading the cash management sales team supporting
the Enterprise Banking segment of the bank. He has more than 15 years of experience in cash
management, having held positions in sales, implementation and client services, handling complex
regional sales and implementation for local corporations and multinational clients. Prior to joining DBS,
he spent three years at HSBC Singapore and 10 years at Bank of America. He holds a Bachelor of Arts
degree in Psychology from the National University of Singapore.
Travis Qiu
Partner, Transfer Pricing and Tax Effective Supply Chain Management, Ernst & Young, Shanghai, China
Travis Qui has 16 years of experience in tax and business advisory and currently specialises in transfer
pricing and tax effective supply chain management (TESCM). He has worked for Ernst & Young in
both Shanghai and New York. His experience includes advising multinational companies on China
investments, mergers and acquisitions, transfer pricing planning, TESCM, and business restructuring.
He has also represented companies in negotiations with tax authorities. He is a member of CICPA and
holds a Bachelor’s (first class honours) degree in accounting from Victoria University of Wellington and a
Bachelor of Economics from Xiamen University, China.
Contributors
Paulo Silva
Manager, Structured Trade Finance, HSBC, Brazil
Paulo Silva has 11 years of experience in financial markets, with particular expertise in credit, commodity
markets and structured trade finance deals. He holds a Bachelor’s degree in Economics from PUC-SP
and an MBA from IBMEC-SP. He previously worked for a rating agency and then spent six years with
retail, wholesale and investment banks, covering a broad range of commodity-related sectors. He joined
HSBC one year ago to support structured trade finance expansion in Brazil.
Eric Striegler
Head of Trade & International, HSBC, Brazil
Eric holds a Bachelor in Economics from UNICAMP, Brazil, and has studied Finance and Management at
FGV, Brazil, INSEAD (France and Singapore) and Duke, USA. Since 2008 he has been Head of Trade &
International for HSBC Brazil, responsible for the Trade, Export and Commodity Finance Sales, Product,
Client Management and Project teams. He deals with a wide range of transactions and clients and
is experienced in negotiating structured financing in Brazil and abroad, as well as being a specialist in
commodity finance. He joined HSBC Group 13 years ago, having previously worked for Banco Real (ABN
AMRO Group).
Jun Takane
Vice President, Sales, Global Payments and Cash Management, HSBC, Japan
Jun Takane is responsible for selling cash management services for multinational and Japanese
corporations. He has recently promoted an extensive cash management solution and consultancy in the
consumer retail and direct marketing sectors. Prior to joining HSBC, he was an entrepreneur representing
a treasury software developer and promoting SwiftNet corporate solutions in Asia, Europe and the US.
He holds a Bachelor’s degree in Industrial and Systems Engineering from Aoyama Gakuin University in
Japan and an MBA from Baruch College of City University, New York.
Arthur Michael Tanseco
Vice President, Regional Product Management, Global Payments and Cash Management, Asia Pacific, HSBC , Hong Kong
Arthur currently supervises a team of product managers handling payments and receivables propositions
across Asia Pacific. He has a total of 14 years of relevant experience across a number of fields, including
operations, sales, compliance, marketing, relationship management, product management, working
capital management, post-merger integration and corporate treasury. Prior to re-joining HSBC in
2008, he was the Regional Treasury Manager for CEMEX in Asia, managing a regional treasury centre
supporting nine countries across Asia Pacific. He holds a Bachelor’s degree in Business Economics from
the University of the Philippines.
Marcus Treacher
Head of Client Experience, Global Payments and Cash Management, HSBC Bank plc, UK
Marcus Treacher has worked in transaction banking and information technology for more than 25 years.
During his career Mr Treacher has held wide ranging positions, including global strategic planning,
global product management, major line management and delivering large-scale information technology
transformation programmes. In his current role, he is responsible for HSBC’s global Internet and hostto-host banking services, which connect several thousand corporate and financial institution customers
to HSBC world-wide, as well as being Head of Client Experience for Payments and Cash Management
world-wide. He is a member of the Board of SWIFT.
Contributors
Ankita Tyagi
Research Associate, Financial Management and Governance, Risk, and Compliance (GRC) practice, Aberdeen Group,
Boston, Massachusetts
Ankita Tyagi is a Research Associate in the Financial Management and Governance, Risk, and
Compliance (GRC) practice at Aberdeen Group. As a researcher, Ankita leverages fact-based research
based on PACE (pressures, actions, capabilities and enablers) methodology to provide guidance to
companies on best practises and technologies necessary to achieve business objectives and to identify
new ROI opportunities. Ankita holds a Bachelor of Science degree in Electrical Engineering, with minors
in Mathematics and Business Administration from the University of Maine, Orono, an MBA (specialisation
in Finance), also from the University of Maine, Orono and a graduate certificate in Leadership with
specialisation in Project Management from Northeastern University, Boston.
Carl Wegner
Head, Transaction Banking, Standard Chartered Bank, Taiwan
Carl Wegner is Head of Transaction Banking in Taiwan, responsible for trade, cash, and custody business
in the wholesale bank. He has over 15 years of experience in corporate banking, with nearly 30 years
experience of working in Asia. Prior to rejoining Standard Chartered Bank in late 2007, Mr Wegner was
the Vice President of Business Development, Asia Pacific region, for TradeCard, a financial services
software company. In various postings, he has been based in Taipei, Shanghai, Beijing, Hong Kong and
Jakarta. He speaks fluent Mandarin and holds a double major in Chinese and Chinese History from
Georgetown University.
Peter Wong
Founding Chairman and President, International Association of CFOs and Corporate Treasurers, China and Convenor, Hong
Kong Association of Corporate Treasurers
Peter Wong is a Fellow of the UK-based Association of Corporate Treasurers and the Chartered Institute
of Management Accountants as well as a CFA charterholder. He is a Fellow of the Hong Kong Institute
of CPA and has served as an Assessor of the Institute’s CPA examination qualification programme since
its inception. He is the founding chairman of IACCT (China) and in 2008 was appointed to an advisory
role with the State Administration of Foreign Exchange in China. Mr Wong has served as an Executive
Board member of the Treasury Markets Association chaired by the Hong Kong Monetary Authority since
2006. He graduated from the University of Hong Kong with an MBA and a Bachelor of Social Sciences
degree, majoring in Economics.
David Woo Kar Wai
General Manager, Corporate Treasury, Hysan Development Co. Ltd., Hong Kong
David Woo has been General Manager, Corporate Treasury for Hysan Development Co. Ltd. since
August 2009, having previously worked in the treasury department and finance division of PCCW
Group from 2000. Prior to joining PCCW, Mr Woo was Vice President (Treasury) of the Hong Kong
Mortgage Corporation and a member of the MTR Corporation treasury team. His early career was
spent in the Treasury Department of HSBC and First National Bank of Chicago. Mr. Woo graduated
from the University of Hong Kong with a Bachelor of Arts degree and completed an MBA programme
at the University of Wisconsin Milwaukee in the US. He is a Chartered Financial Analyst, a Financial Risk
Manager and a member of the Association of Chartered Certified Accountants.
Contributors
Catherine Yu
Asia Pacific Regional Controller, British Telecom Global Services
Catherine Yu is the Asia Pacific Regional Controller of British Telecom Global Services, a global
telecommunication company. Before she joined BTGS she was the Associate Director, Compliance and
Process Improvement, Asia Pacific for Merck & Co. Inc., a global pharmaceutical company. She started
her career in Price Waterhouse and has extensive professional experience in different disciplines of
finance.
Violet Yung
Vice President Regional Sales, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
Violet Yung joined HSBC in May 2010 as a project consultant. She is working with the Project Extended
Enterprise team carrying out feasibility studies with HSBC’s clients. Violet has 15 years of treasury and
corporate finance experience. Prior to joining HSBC, she worked for Tesco PLC as regional treasurer for
Asia, CLP Holdings and Pacific Century Cyberworks in Hong Kong.
Treasury Associations in Asia Pacific
Australia
Finance & Treasury Association
ABN 70 006 509 655
PO Box 84
Hampton VIC 3188
Australia
President: Mike Dontschuk
Tel:
[61] (3) 8534 5060
Fax:
[61] (3) 9530 8911
E-mail:
[email protected]
Web site: www.finance-treasury.com
China/Hong Kong SAR
• International Association of CFOs and Corporate Treasurers (China)
• Hong Kong Association of Corporate Treasurers
45th Floor, The Lee Gardens,
33 Hysan Avenue, Causeway Bay,
Hong Kong
Chairman: Peter Wong
Tel:
[852] 3180 7731, 6986 6088
Fax:
[852] 3180 2299
E-mail:
[email protected]
Web site: www.iacctchina.com
Korea
Korea Association for CFOs
7F Borim Building
Myung-dong-1-ka 5-1
Jung-ku, Seoul, 100-021
Korea
Executive Managing Director:
Robin (Woo-Don) Lim
Tel: [82] (2) 755 8670–1
Fax: [82] (2) 755 8672
Web site: www.cfokorea.org
Malaysia
Malaysian Association of Corporate Treasurers
9th Floor, Balai Felda, Jalan Gurney Satu
54000 Kuala Lumpur
Malaysia
Contact: Anne Rodrigues
Tel: [60] (3) 240 5201
Fax: [60] (3) 298 2677
India
The Association of Certified Treasury Managers
52 Nagarjuna Hills
Hyderabad 500 082
India
Tel: [91] (40) 2343 5368–74
Fax: [91] (40) 2335 2521
Web site: www.actmindia.org
New Zealand
Institute of Finance Professionals
New Zealand Inc.
PO Box 10 350
Wellington
New Zealand
Executive Director: Paul Hocking
Tel: [64] (4) 499 1870
Fax: [64] (4) 499 1840
Web site: www.infinz.com
Japan
Japan Association for CFOs (JACFO)
Shiozaki Building 2F, 2-7-1
Hirakawacho, Chiyoda-ku
Tokyo
Japan 102-0093
President: Toyoo Gyohten
Tel: [81] (3) 3556 2334
Fax: [81] (3) 3556 2320
Web site: www.cfo.jp
Singapore
Association of Corporate Treasurers (Singapore)
Secretariat
SBF Training & Consultancy (International) Pte Ltd
C/O Block 51, Telok Blangah Drive
#06-142, Singapore 100051
President: Joe Calabro
Contact: Dennis Koh
Tel/Fax: [65] 6764 6577
Web site: www.act.org.sg
The New
Economic Landscape
The New Norms of
Financial Markets for
Corporate Treasurers
• Economic recovery is proving slower than
expected, and banks’ room for manoeuvre
is limited. However, China’s growth has
provided stability to the region.
• In a low interest rate environment, financial
supply chain integration will grow in
importance for corporate treasurers.
• The liberalisation of the RMB offers new
opportunities for diversifying liquidity but
underlines the need for more sophisticated
capital markets in China.
• Sophisticated treasury management
systems are vital as overseas direct
investment and M&A activity grow in the
region.
Peter Wong, Founding Chairman and President, International Association of CFOs and Corporate Treasurers, China
and Convenor, Hong Kong Association of Corporate Treasurers
T
he time to complete the deleveraging process in the US and Europe has taken longer than the
market had expected. Unemployment remains stubbornly high. Governments are facing a tough
choice between containing fiscal deficits and promoting recovery. Austerity measures are unpopular
among voters.
As a financial intermediary, the banking sector is constrained in its ability to finance growth. While
quantitative easing has kept the inter-bank rate at historically low levels, banks are not growing their
balance sheets. They have concerns over a new round of bad debt should there be a double dip
recession, the tendency to avoid new rights issues and the remote chance of another government
bailout. The new capital adequacy rules (Basel II and III) also raised the banks’ hurdle rate in approving
financially viable lending. The current widening of margins due to low inter-bank rates may not be
sustainable when interest rates start to go up. Banks are very cautious.
China’s economic growth provides a strong stabilising force for Asia. Substantial inflows of funds
from the US and Europe to Asia have generated excessive liquidity, creating asset bubbles, currency
appreciation, inflation and pressure for policy tightening. The ramifications of bursting asset bubbles in
Asia create much anxiety in the financial markets. Commodity prices rose in anticipation of the China
growth story, the depreciating US dollar and inflation. The reverse outcome may come about should
there be a hard landing in China. The consequence may be a significant correction in asset prices
resulting in loss in investment confidence and contraction in consumer demand due to the negative
wealth effect.
Lessons and Opportunities
The lesson learnt from the financial tsunami is the need to prepare for such black swan events.
The behaviour of market participants should reflect these expectations. Unfortunately the market’s
view tends be to be one-sided, which exacerbates the speed and magnitude of the swing in market
movement. Corporate treasurers need to position themselves accordingly when managing financial risks.
The liberalisation of the RMB market, on the other hand, creates new opportunities for corporate
treasurers to manage their liquidity, funding and currency risks. Increasing numbers of Chinese enterprises
are transforming into China multinational corporations (MNCs) as they increase overseas direct investment
and cross-border merger and acquisition (M&A) activities. They have participated actively in our treasury
association’s events on knowledge and best practice sharing in international treasury management.
The expansion of the financial markets in Asia will create increased demand for the treasury and financial
market skills required to support the growth of the financial services industry in the region. Through
better managing financial risks and achieving treasury efficiencies, treasurers will continue to play an
important role in the corporate world to promote profitable and sustainable growth.
The New Dimensions of Risk:
Liquidity, Currency and Market Risk
Traditionally, corporate treasurers have focused on perfecting cash forecasts and the pooling of cash to
minimise the need to run overdraft balances and to maximise yields from short-term funds. In the postcrisis era most have increased their precautionary balances of short-term cash.
In the current low interest rate environment, high cash balances carry almost zero return. In Asia this
has facilitated the growth of supply chain financial integration, where importers or buyers provide the
certainty of cash flow to exporters. This is particularly useful for small and medium enterprises (SMEs),
which are facing higher trade finance costs post-crisis and the rationing of trade credit facilities by banks.
However, bundling financing and business arrangements may magnify the problem for exporters if they
have to find replacements for both at the same time.
In managing their payables, treasurers can improve the certainty of cash outflow by achieving a higher
degree of integration between their enterprise resource planning (ERP) systems and their treasury
management systems (TMS) and by considering the decision to outsource their disbursement
arrangements to international cash management banks. The economies of scale and efficiency gained
deserve a serious treasury review if the scope is regional (Asia) or global. Many Asian markets have realtime gross settlement (RTGS) electronic payment infrastructures. The Hong Kong Monetary Authority
was the first in Asia to introduce RTGS in 1996. The scanning and internet technology available today
have made e-payment solutions more affordable.
Managing liquidity risk cannot be isolated from the decision to manage currency risk. Many US and
European MNCs have seen their Asian operations growing in significant proportion to the size of their
global business. This trend is expected to accelerate, given the virtuous cycle of Asia’s high savings
ratio and growing middle class, which support rises in domestic consumption, thereby making Asia less
susceptible to sluggish export demand from the US and European markets. Over the years we have
seen Asia investing heavily in infrastructure that facilitates the process of urbanisation, particularly in
India and China. The mindset of keeping global cash surpluses in USD, EUR or GBP may need a rethink if
future investments are going to be made in Asia – Asian currencies stand a much higher chance of longterm appreciation.
The recent liberalisation of the RMB offers a new opportunity for companies to diversify their liquidity
pools. The Chinese authorities are encouraging importers to use RMB as a settlement currency for
international trade. Hong Kong, for example, is a main benefactor of this new policy, with RMB deposits
in Hong Kong more than doubling in recent years and becoming the largest offshore RMB pool in the
world. There is still a lot of room to expand money markets and investment products in Hong Kong, but
the trend is very promising.
The USD has been depreciating since the 1970s. Such a trend is widely expected to continue, given
the US government’s increasing liabilities. This has caused much anxiety among investors who hold
substantial USD assets. Given the shift of business to Asia and the future cash flow needed to invest in
the region, treasurers will need to evaluate how their cash holdings should be diversified among different
currencies to avoid the cost of mismatch. Also, many MNCs use USD as their global cash concentration
currency to fund local currency expenditure in Asia. This may need to be revisited as appreciating Asian
currencies will result in foreign exchange costs to the payable settlement.
The low interest rates in the US and the weak outlook for the USD have made the USD carry trade
attractive. The market risk of a reversal of one or both of these scenarios, and the financial impact if there
were, should be evaluated. The challenge for treasurers is how to make the right call when the market is
by its nature unpredictable. Here are some suggestions:
Treasurers need to be open minded and prepared to challenge the status quo in order to identify all
options. Once due process is done, they should present their recommended option, together with
second or third options with different risk-return trade offs.
Treasurers not only need to do it right, they need to do it properly. Sound corporate governance
practices require treasurers to obtain proper approval and delegation of authority from the Board
before they execute treasury transactions. The Board also has to be kept informed of any material
developments. Apart from compliance, treasurers should consider not just short term gain but also
how a decision may impact the long term sustainability of the company.
Current mark-to-market accounting rules could cause volatility in financial performance linked to
significant treasury transactions. Whatever the outcome, treasurers need to explain it properly to
all stakeholders: shareholders (including equity fund managers), the Board, bank creditors, bond
investors, regulators, customers, vendors, the media and – of course – the staff. Investor relations
and corporate communication skills are vital here.
Emerging Asian MNCs and
the Future Development of Treasury Markets
The dominance of Japan in the automobile and electronics industries has made Japanese MNCs world
leaders. Among the Fortune Global 500 list in 2010, 71 were from Japan. This was slightly lower than
81 five years ago. The number of other Asian MNCs on the list is increasing rapidly: from 45 in 2005
to 83 in 2010, with the most impressive growth coming from mainland China, Hong Kong and Taiwan.
The number in what is commonly called the Greater China Region rose from 18 to 54 in this period.
There were 10 from South Korea, eight from Australia, eight from India and one each from Singapore,
Malaysia and Thailand. For comparison, the other two BRIC countries (Brazil and Russia) had seven and
six respectively. The threshold to reach the Global 500 list was USD17bn of revenue compared with
USD4bn for the US 500.
According to a senior treasurer at a leading Chinese MNC, the main challenges for treasury management
in China are the search for experienced talent and the need for a more sophisticated capital market and
diversified banking products. The drive to promote international treasury education was high on the
agenda at the recent annual meeting of the International Group of Treasury Associations (IGTA) held
in Geneva in October 2010. The International Association of CFOs and Corporate Treasurers (IACCT)
and the Hong Kong Association of Corporate Treasurers (HKACT) established a strategic partnership in
2006 with the UK Association of Corporate Treasurers to promote treasury education in Greater China.
This included the Certificate of International Treasury Management (Cert ITM) and other qualifications
accessible through distance learning. In Beijing, Shanghai and South China, IACCT partnered with the
Ministry of Finance, the China Association of CFOs, the Shanghai Accounting Society and the American
Chamber of South China to promote international treasury best practice to their members. Joint
seminars and experience-sharing networking events organised with partners including SWIFT, banks,
TMS service providers, Thomson Reuters and accounting firms have proved to be popular in Hong Kong
and Mainland cities.
Asia has grown in the level of sophistication of its treasury markets, particularly in financial infrastructure
(e.g. domestic and regional RTGS) and cooperation among Asian central banks (e.g. contingency swap
lines to provide border liquidity). The main financial centres in Asia (Tokyo, Hong Kong and Singapore)
have also grown in global importance based upon – to take one example – the 2010 Bank of International
Settlement (BIS) Foreign Exchange Survey. Asian governments have responded proactively during the
recent financial crisis. Financial regulators in Australia, Hong Kong, Malaysia, Singapore, Taiwan and
South Korea swiftly put together their versions of enhanced deposit protection schemes that were the
key to maintaining investor confidence at the time. Most of the schemes have since expired without
any adverse result in terms of capital outflow. On the contrary, portfolio and foreign direct investments
continue to make their way from the US and European markets into Asia. International credit rating
agencies have upgraded the sovereign rating of many Asian jurisdictions. For example, recent upgrade
action by Moody’s rates Hong Kong as Aa1 (with positive outlook), which is only one notch from Aaa,
and China is Aa3 (with positive outlook).
Two Main Areas for Further Development
Against this background of strong economic fundamentals, there are many opportunities for further
development in treasury markets. These are important for treasurers in managing their funding, liquidity,
investments and risks in Asia.
First of all, there is a need to develop a diversity of long-term funding sources. While the strong growth
in the stock markets in Hong Kong and Shanghai has enabled many Asian and Chinese firms to expand
their equity capital base and the banking market is highly liquid, with strong capital adequacy and
relatively low leverage (loan-to-deposit ratios), there remains room to grow for the corporate bond
market:
Deepen the market with further increases in the number of high grade issuers, and permit MNCs to
issue bonds on the Mainland. Initially the funds raised by MNCs should be used only in China.
Lengthen the maturity of bonds. This may be difficult if investors begin to build in an expectation of
rising inflation, as long durations may magnify market risk. However, certain categories of investor (e.g.
life insurance companies and pay-as-you-go pension funds) may prefer certainty of future cash flows.
Promote the corporate bond fund market. Institutional investors (bond fund managers) are
professional investors and therefore positioned to evaluate the credit of issues and issuers. They
have substantial funds and can provide liquidity to facilitate secondary market trading. Through the
QFII scheme, investors in Asia can diversify their long term investment holdings from USD assets to
RMB.
The recent development of the offshore RMB corporate bond market in Hong Kong offers
opportunities for treasurers to diversify their funding from traditional bank loans to longer term bonds.
The duration of these issues will in time be extended from the existing two to three year maturities
as the long-dated yield curve develops.
Secondly, treasurers can improve their capability to monitor and make timely execution by establishing a
robust treasury management system for the following reasons:
Many Asian and Chinese corporations face the growing need to manage regional or global liquidity as
they increase cross-border M&A and overseas direct investment. The ability to move funds across
jurisdictions and keep the cash pools in the right currencies are crucial to managing liquidity and
currency risk.
The higher the inflow of funds into the local market, the greater the liquidity risk in the event of a
reversal. This could manifest itself in sharply higher inter-bank rates and reluctance on the part of
banks to provide credit. A TMS enables treasurers to perform a vigorous funding gap analysis to
identify cash flow at risk for different maturity periods and then consider precautionary measures
such as interest rate swaps or the staggering of refinancing requirements.
During this present time of zero interest rates, there is a temptation to park cash in higher yield
instruments. However the risk-return trade off has to be carefully evaluated and swift reallocation
of funds in a stop-loss situation is critical. A good TMS enables treasurers to monitor the credit risk
of banks or underlying investments in a holistic way, so that they can report any significant credit
deterioration to their Board.
Conclusion
Forecasting is a tool but not a solution. We may not have the answer to how long the US unemployment
rate will take to return to pre-crisis levels, or whether China’s economy will have a hard landing should
the asset bubble burst. It is futile to time the market, but one has to make an informed decision. Be
flexible and adaptive. For there to be good governance, treasurers must be responsible for providing their
board and senior management with an assessment of the financial risks in relation to their business and
the decisions the companies will make. In good times or bad, treasurers need to master the control of
liquidity, as cash flow is the key to survival and growth. There are companies that evolve more strongly
after a crisis and we should all aspire to be the ones that do.
Rohit De Rozario, Senior Vice President, and Chuen Yick Lam, Vice President, Markets Management, Global
• There are several significant macro-economic trends appearing in the countries that make up
“emerging Asia”.
• Through engagement with clients in these countries, the authors of this article have identified
seven key trends that corporates are seeking to follow as part of their strategies to drive growth.
• These medium- to long-term trends are expected to receive increased visibility as the decade
progresses and to affect economic growth across emerging Asia.
• As the impact of these trends will vary according to sector, country and other factors, companies
should consider each of these trends as part of their growth strategy in the coming years.
T
he 2008 financial crisis has now passed and emerging Asia1 has bounced back from the financial
crisis. Companies are shifting from a strategy of “cost management” to one of “managing for
growth”. There are significant macro-economic trends in emerging Asia that corporates are seeking to
follow as they deploy strategies to drive growth. These emerging trends will pose new challenges in
the context of technology, processes, marketing and people. which corporates will need to manage to
deliver value for their shareholders.
This article outlines seven key trends that the authors believe will play out over the medium- to long-term
and which will have maximum impact on future corporate growth strategies. These trends have been
identified through engagement with our clients across emerging Asia and validated through secondary
research. Our findings indicate a corporate awareness of a number of these trends by our clients and a
strategic focus to leverage the opportunities that these trends present.
The East–East Economic Transition
In the last couple of decades, there has been a gradual shift from the East’s dependence on imports
by the West to an East–East economic transition. This is evidenced by the Asian trade, which has
grown 380% since 1990 and contributed 30% of the 2008 world total, up from 22% in 1990. Asia’s
1
Emerging Asia is defined here as China; the Asian subcontinent (i.e. India, Bangladesh and Sri Lanka); and the Asean 5 –
Indonesia, Malaysia, Thailand, Vietnam and the Philippines.
intra-regional trade now comprises 52% of the overall Asian total in 2008, up from 43% in 1990.2 This
represents a USD3tr or 440% growth in absolute terms. In other words, Asian manufacturers are selling
more in the region than to the rest of the world.
We see three key drivers of this shift:
A growth in domestic consumption driven by government policy shifts, i.e. significantly lower yields
on savings and gradually improving social security networks in emerging Asia, which encourages
spending;
Emergence of regional bodies, such as the Association of Southeast Asian Nations (ASEAN) and
the South Asian Association for Regional Cooperation (SAARC), with a strong focus on free trade
agreements within Asia and greater economic integration; and
Evolution of large local corporates with strong brands that enhance their foothold in the region and
with a deep knowledge of the local emerging markets.
Further East–East economic acceleration will mean any
corporate looking for growth will need a presence in
emerging Asia. More importantly, it will require a good
understanding of the local markets, with the ability to cope
with challenging political landscapes and frequent policy
changes. They will also need to operate in highly regulated
local markets, successfully integrate local sourcing and
distribution channels to ensure pricing competitiveness,
and develop local talent to win in the longer term.
The Demographic Shift
Demographics influence both consumption and savings patterns, and therefore have a strong bearing on
future growth. A number of research papers are available on this subject. Some interesting extrapolations
that stand out are that by 2030 two out of every three people in the global workforce are expected to be
Chinese or Indian, while one third of the world’s population will be in emerging Asia. The majority will
live in urban areas. In addition, the average worker in emerging Asia will be in his or her late 30s, and an
increasing number of females will be participating in the workforce.
This change in demographics translates into:
A larger middle class now demanding better quality products and services;
Higher disposable incomes as both members of the family join the workforce, driving further
consumption;
Reversal of the “brain drain” to developed markets as talent returns to high-growth emerging Asian
markets; and
Relocation of manufacturing and service bases to emerging Asia to leverage lower-cost resource
availability.
Over the next couple of decades, we believe, demographics will have a greater impact on corporate
growth strategy than any other factor, driving future products and service mix; influencing manufacturing
and service locations; and affecting cost of production and brand value.
2
“Intra-regional Trade Key to Asia’s Export Boom”, The International Monetary Fund (IMF), 2008. Available on the IMF
web site, www.imf.org.
The “Inclusion” Wave
Inclusive growth and sustainable development are issues now in focus, especially for emerging Asia.
Countries are working towards ensuring that economic growth actually translates into poverty reduction
that is sustainable over the long term. The challenge is in ensuring that the poorest communities in the
most rural areas are provided with basic healthcare and education facilities; exploitation of resources and
people is reduced; effective lending is available to allow for rural enterprise creation; and migration to
cities is reduced through enhanced agriculture and small enterprise creation.
As a starting point, the focus is on financial inclusion. A study by the United Nations indicates that
approximately 40% of the world’s population live on less than USD2 per day3 and a majority of these
people do not have access to a bank account, therefore limiting their ability to save or borrow. While
financial inclusion has always been associated with
banking, corporates can also play a meaningful
role in the following ways:
Large retail networks can deploy financial capital and
experienced staff for development of products and
services to drive financial inclusion.
Efficient cash management and retail outlet monitoring
systems may be advantageous in driving collections
of savings and borrowing.
Corporates’ retail agents cover significant geographies
as part of their distribution networks.
Corporates can ensure continuity of services more than individuals.
We expect that financial inclusion will be a significant growth driver, presenting an opportunity to
companies that have established distribution networks to source and sell in rural emerging Asian
markets (e.g. retail, telecom, non-banking financial companies, cooperative societies). It will also result
in companies having longer term plans for emerging Asian countries, as governments provide tax
reductions and other incentives for companies that work towards development of rural education,
healthcare and resource regeneration as part of their corporate participation models.
The Connectivity and Infrastructure Transformation
Emerging Asia is being visibly transformed by the building of roads, ports, airports, housing, railways and
telecommunication networks. Governments are focused on creating the connectivity and infrastructure
required to deliver rapid growth. This trend is in line with global trends. For example, passenger air traffic
increased by more than 25% from 2005 to 2010,4 and Internet conectivity grew by 445% in the last
decade.5 Of the enormous amount spent on infrastructure in emerging Asia over the next decade, the
majority of the projects will be developed through public-private partnerships.
3
4
5
Data computed from Figure II.1, page 14, “Rethinking Poverty: Report on the World Social Situation 2010”, a report by
the United Nations.
“Air Transport Market Analysis”, International Air Transport Association, 2010.
See www.iata.org/whatwedo/Documents/economics/MIS_Note_Jun10.pdf
“Internet in Asia”, Internet World Statistics, 2009.
See www.internetworldstats.com/stats3.htm#asia.
Connectivity is bringing change in many ways. A few examples to illustrate:
Local retailers now have to compete with the delivery services of virtual shops on the World Wide
Web because their clients have Internet access.
Local producers of fresh meat and vegetables can now enter the national market with the opening of
a new local airport.
Mobile-based payments and fund transfers provide banking services to sectors of the population
who are underbanked.
In addition to participating industries (e.g. airlines, shipping
and logistics, telecommunications, construction and their
supply chains) benefiting from growth opportunities, there
are also new opportunities for businesses of all sizes,
and across all sectors. Corporates will need to review
their longer-term business models and the competitive
advantage impacted by these infrastructure changes, especially their sales initiation and order fulfilment
channels, as well as procurement and manufacturing bases.
The “Green” Revolution
The “Green” Revolution is defined by the need to preserve the environment for coming generations. It
is estimated that the worldwide potential revenue for green products will reach USD889bn by 2020.6
Another survey in 2008 shows that 75% of Europeans are ready to buy these products even if they cost
more, compared to 31% in 2005.7 Emerging Asia is also
expected to follow this trend over the coming decade.
For example, in 2008 China rejected projects worth
USD69bn because of the pollution they would cause.8
China has also ordered banks to stop extending loans to
projects that run foul of the country’s policies of energy
conservation and pollution reduction.9
The decision to buy green is currently affected by the
bandwagon effect10, similar to that for luxury goods.
Significant efforts are being made by companies to
differentiate their products and services on the green platform, with recycled products, paperless
transactions, green certification, etc. Governments are also driving education and focus by encouraging
waste recycling and water conservation, banning the use of certain non-biodegradable plastics and
offering tax concessions for electric vehicles. There is still much that needs to be done by emerging Asia
in this regard, but the initial steps are being taken.
6
“Interim Report of the Green Growth Strategy”, Organisation for Economic Co-operation and Development (OECD),
2010. Available on the OECD web site, www.oecd.org.
7 European Commission, via “Environmental Policy in a Differentiated Market with a Green Network Effect”, Dorothée
Brécard, Université de Nantes, France, 2009.
8 “China Blocks USD69bn of Polluting Projects to Cut Emissions”, Bloomberg, 8 June 2009.
9 “China Banks Told to Stop New Loans to High-Polluting Industries”, Xinhua News Agency, 21 June 2010.
10 The bandwagon effect refers to the extent to which the demand for a commodity is increased due to the fact that others
are also consuming the same commodity.
As a differentiator, being green will be an important element of future corporate strategy. We expect that
the rate of adoption of green products and services will increase as this decade progresses with a price
premium that can be maintained, which will directly contribute to enhanced bottom-line growth.
The “Here Today, Gone Tomorrow” Product Lifecycle
The product lifecycle is becoming shorter and, while this was typically associated with Western
markets, the trend is also being observed in emerging Asia. The growing speed at which manufacturers
commercialise new technologies is illustrated by the history of the television.11 The first public
demonstration of the TV concept was conducted in 1895. Commercial broadcasting was introduced
in 1907. Colour TV arrived two decades later and TV sets remained fundamentally the same until
remote control was adopted in 1950. In the last decade the technology breakthroughs12 started with
wide availability of flat-screen TVs and culminated with the recent introduction of digital high-definition
broadcasting and 3-D display.
Emerging Asia is now willing to upgrade products and services faster to enjoy new product features,
thus increasing the speed of product obsolescence. The shortening product lifecycle means that there
is a shorter timeframe to capitalise on commercial success and a greater need for smart investment in
research and development (R&D) to ensure a competitive advantage. A few interesting facts are:
Asia Pacific’s share of global R&D expenditure increased from 24% to 31% between 1996 and 2007
and is expected to grow further driven by emerging Asia.13
Asia represented 41.4% of world researchers in 2007 compared to 37.5% in 2002.14
Global multinationals increased their total R&D sites by 6% between 2004 and 2007, and of those
new sites, 83% were in China and India. They also increased R&D staff by 22%; 91% of that increase
was in China and India.15
Strategically it will be important for corporates to focus on
R&D as part of their growth strategy. Product innovation
and differentiation will be critical to creating shareholder
value, especially as fewer flagship products will be driving
a significant proportion of revenue, thus increasing the
“revenue at risk” due to faster product obsolescence.
The “Small is Beautiful” Entrepreneurship Growth
The availability of venture capital and low-cost local funding (an outcome of rate reductions following
the financial crisis) as well as technology and a large local consumer base is creating a growth in new
entrepreneurs. Embracing the view that “small is beautiful”, more than a million small businesses are set
up each year in emerging Asia, and a number of these later develop into medium-sized corporates.
11 For a timeline of invention of television, see www.history-timelines.org.uk/events-timelines/08-television-inventiontimeline.htm
12 Many of the new technologies had existed for decades but were adopted for TV for the first time.
13 “Global Expansion of Research and Development Expenditures”, Science and Engineering Indicators 2010, National
Science Board, National Science Foundation, see www.nsf.gov.
14 www.unesco.org/science/psd/wsd07/Fact_Sheet_2009.pdf “Human Resources in R&D”, UNESCO Institute for
Statistics.
15 “Beyond Borders: The Global Innovation 1000”, Barry Jaruzelski and Kevin Dehoff.
This growth in entrepreneurship and the corresponding increase in small and medium-sized enterprises
(SMEs) are expected to be strong contributors to gross domestic product (GDP) growth in emerging
Asia. Working in their favour, SMEs:
Tend to be faster at innovation due to their specific focus and their small size;
May be involved in developing patented technology, especially those in the information and
communication technology (ICT) sector;
Have the ability to focus on a specific target segment;
Are faster to adopt technology and offer price differentiation; and
Are an integral part of large corporate supply chains.
To compete, corporates will need to consider acquisitions of SMEs or direct stake participation in SMEs
as a driver of future growth.
Conclusion
The impact of each of these trends, and the extent to which corporates align their future strategies to
capture the opportunities that these trends present, will vary by sector, the investment required (especially
those trends not focused on cost leadership) and country participation models. Each trend needs to be
defined independently by each company, and considered as part of its growth strategy in the coming
years.
Working Capital
Management
David Blair, Vice President, Treasury, Huawei, China
• The global financial crisis is still keenly felt. Measures to cope with it, such as quantitative easing
and the Basel III accords, may have unintended consequences.
• China overtaking Japan as the world’s second largest economy is just one indicator of global
change in which all treasurers need to do more with less.
• Treasurers need to focus on value-added business support and cash flow needs to be
everybody’s concern.
• Recent history has taught us to prepare for the unexpected: scenario planning skills are more
important than ever.
T
he conclusions after SWIFT’s SIBOS conference at the end of October are sobering. At best we are
over the worst, but the longer term consequences of massive quantitative easing (QE) needed to
get us through the global financial crisis are unclear and unlikely to be happy. With the Federal Reserve
having confirmed “QE2”, even the short term is not assured. Ben Bernanke, chairman of the US Federal
Reserve, told senators that the economic outlook “remains unusually uncertain”.
At SIBOS, some banks estimated that the unintended consequences of the updated Basel III accords
might cut 2% from global trade1 – this at a time when western governments desperately need to grow
their way out of debt. “If the regulations are implemented as they are currently written,” said Karen
Fawcett, Senior Managing Director and Group Head Of Transaction Banking, Standard Chartered Bank,
“we could be seeing a 2% fall in global trade and a 0.5% fall in global GDP”.
Under proposed guidelines from the Basel Committee on Banking Supervision, a 100% capital
requirement leverage ratio will be imposed on trade finance, five times higher than the 20% level
recommended under existing Basel II guidelines. There seem to be clear risks that Basel III may
negatively impact trade instruments by forcing banks to weight them 100%, thereby increasing the cost
of trade. This will likely reduce trade, further hampering any recovery. Although it looks like the threat
1
www.swift.com/sibos2010/home_page/publications/sibos_issues/thursday.pdf#page=1
On the other hand, there are big shifts in the global economy underway. China has overtaken Japan to
become the world’s second largest economy. Corporates that have not already established themselves
in China are scrambling to catch up with this new reality. Even though China’s rise seems like an
unstoppable demographic juggernaut, it is not clear that the road will be smooth – pessimists point to
regulatory, political and financial risks, such as the housing bubble and the rapid expansion of Chinese
bank balance sheets post-global financial crisis.
We are facing very uncertain times both from a macroeconomic perspective and from a treasury
perspective. Our businesses are faced with uncertainties that demand a defensive posture at the same
time as we need to aggressively pursue the few remaining growth niches. In treasury, we face uncertainty
in terms of funding and even execution of routine transactions because of the pressures on banks.
Facing Uncertainty
The global financial crisis has focussed corporate attention on cash flow and liquidity, putting treasurers
in the spotlight. According to the PricewaterhouseCoopers (PwC) Global Treasury Survey 2010, 80% of
treasurers feel they have more board level attention and 70% feel more valued. On the other hand, the
crisis has made companies frugal: “Only 20% have secured extra resources as a result of the crisis.”2
The tension between uncertainty driving a defensive posture amongst companies and on the other hand
the need to aggressively pursue new opportunities makes for interesting times for corporate treasurers. We
need to do more with less: in the latest management jargon, we need “jugaad”3 or “frugal innovation”.
Macro Uncertainties Lead to Increased Costs
Treasury has to deal with the conflict of resource constraints and potentially stretched requirements. Our
businesses’ defensive stance towards macro uncertainties mandates cutting costs. Banks’ defensive
stances towards macro and regulatory uncertainties make it harder to get funding and may increase the
cost of treasury services and products. On the other hand, we need to be able to move fast to support
the business in any opportunities that may arise – such as new sectors, new geographies, acquisitions,
and so forth.
This is creating measurable changes in behaviour. For example, in the years before 2007 the annual
Association of Corporate Treasurers (ACT) Global Cash Management Survey had shown a clear trend
towards smaller bank groups, as treasurers sought to simplify their bank relations. After the crisis, this trend
reversed as treasurers added banks to diversify their funding sources and reduce credit risk exposures.
2
3
PricewaterhouseCoopers (PwC) Global Treasury Survey 2010
Jugaad: A New Growth Formula for Corporate America - Navi Radjou, Jaideep Prabhu, and Simone Ahuja. Harvard
Business Review, 25 January 2010
of corporate foreign exchange (FX) moving on to
collateralised exchanges has receded – thanks to the
sterling efforts of a few corporations that have lobbied hard
for all our benefit – we cannot exclude from our scenario
planning the risk of the massive cash flow volatility that
collateral on FX would cause. Add to this a large measure
of political uncertainty, as governments squirm to find
palatable solutions to the basically unpalatable reality that most western economies have overspent.
Another trend is the strong shift to emerging markets, especially China and India. This creates challenges
for treasurers who may not have been familiar with the intricacies of emerging market treasury. This is
further exacerbated by the difficulty in finding experienced staff in emerging markets, especially while
they are booming.
Adding Value in a New Operating Environment
More than ever, it is incumbent on us as treasurers to work smart – this means eliminating unnecessary
work and automating or outsourcing routine work so that we can focus on value added business
support. Of course such changes will require an investment of time and money which will be hard to
fund in these times. So we will have to be very selective about getting maximum bang for our buck, both
in terms of return on investment (ROI) and in terms of positioning.
Different companies will arrive at different answers
depending on their own strengths, weaknesses,
opportunities and threats (SWOT). In fact, now is an
ideal time to review where we stand in SWOT terms.
Both the internal and the external environment will have
changed substantially in the crisis and its aftermath. And
businesses pondering the new normal (whatever it is) may
be more open to change than was previously the case.
In treasuries that have been self-contained back offices,
it may be a good time to take a wider view of end-to-end
processes to look for possible improvements. Most companies have some kinds of legacies based on
historic needs and capabilities that provide fertile ground for enhanced productivity. Companies that have
already streamlined internal processes will often find inefficiencies in supply chains.
Supply chain is much discussed, and with increasing urgency, as governments try to boost trade and as
bank financing comes under pressure post-crisis and from the unintended consequences of regulation.
And there is a lot of activity and innovation in financial supply chains. But integration remains weak
despite progress in some Asian trade centres. Singapore, Hong Kong and Taiwan have governmentsupported trade hubs that help local small and medium enterprises (SMEs) to smooth their trade flows.
Forward thinking Nordic governments are pushing e-invoicing by mandating it for government contracts.
But SWIFT’s Trade Services Utility (TSU), with its vision of inter-operable trade flows mediated by banks
as trusted partners, has yet to gain serious traction.
So financial supply chain innovation tends to remain bilateral, where a bank creates a specific solution
for a customer without integrating the customer’s trading partners. This is typically on the payable side,
where the buyer and its bank can control the flows with relative ease. This does not allow integration
through multiple layers of the supply chain – which TSU does enable – and so falls short of optimal
supply chain funding efficiency.
I remain surprised at our lack of progress in holistic supply chain financing, despite the back to basics
trend evidenced in the PricewaterhouseCoopers (PwC) Global Treasury Survey 2010: “The proportion
of participants rating cash management and working capital management as highly important has more
than doubled (from 35% pre-crisis to more than 70% during and after)”.4
4
PricewaterhouseCoopers (PwC) Global Treasury Survey 2010
The Yin and Yang of Treasury
For many of these, there are no easy answers and, in any case, the answers will depend on each
company’s circumstances. A lack of easy answers does not mean there is nothing to be done, though.
Many of the conflicts can be reconciled with judicious process review (eliminating as well as redesigning) and technology – particularly from an organisational perspective.
Centralisation without the Disadvantages
Traditionally centralisation brought lower costs with the disadvantage of lost local knowledge and
flexibility. Using now commonly available telecommunications and social technology together with
judicious staff rotation, we can have the best of both worlds.
Some companies have centralised and brought regional staff to their headquarters to maintain contact
with local counterparties. Best practice for a truly global company might be a distributed organisational
model where sectoral responsibility is distributed around the globe but acts as one global function to
avoid the cost of hierarchical layers. This is dramatically facilitated by Internet technologies. We can have
global functions with local flexibility and knowledge.
The old profit centre versus cost centre treasury discussion has largely subsided. Over the last 25 years
I have seen corporate treasuries gradually drop nostro trading for profit (currencies in Scandinavia, stocks
in Japan, etc.) as market changes and simple volatility made it unsustainable. But I think there is still a
place for value-added treasury as opposed to the cost centre treasury. Value-added forces treasury to
think holistically about what is in the best interests of the company, rather than simply looking to cut
costs.
Cash Flow is not Just a Treasury Concern
Looking beyond the confines of treasury, now is a good time to review the incentives in the company.
Treasury cannot manage cash flow alone: it can lead a discussion about the importance of cash flow. If
cash flow is agreed to be important then it follows naturally that cash flow will form an important part of
all employees’ incentives – for instance in the form of economic value added (EVA), operating cash flow
(OCF) or net working capital ratio (NWCR).
Within treasury, incentives need to be aligned with treasury’s objectives. In a value-added treasury, that
means incentives for value added or contribution. These must be structured in a fair and transparent way
In the post crisis world, treasurers have to face conflicting requirements such as:
Cost versus flexibility;
Cost versus risk;
Centralise versus distribute;
Invest versus make do;
Value-add versus cost centre;
Cash buffer versus cost of cash;
Control versus cost of control;
Secure long-term funding versus cheap short-term funding; and
Pay hedge cost versus take risk.
to encourage treasury staff to think more widely about how to create benefits for the company. They
also need to be risk adjusted to avoid adding financial risk that is not core to the business (risk adjustment
probably has to be complemented with static boundaries such as “no position taking”).
The management system for bank relations might be due for review. I often get the impression that
banks track relationship profitability much better than most corporations (though there is undoubtedly
wide variance). On the process side, we need to look beyond established habits to find opportunities for
value added. Especially among more clerical and less technology-oriented staff, some of my favourite
questions are “Where do you spend the most time?” and “What tasks feel most repetitive?” Tasks
that fit these questions are often ripe for review and possibly automation. Tasks like re-keying data
and copying and pasting from and to spreadsheets are obvious candidates for automation, with the
side benefit of reduced operational risk. Also, you might find staff laboriously assembling spreadsheet
reports that could easily be put together using the dashboard functionality in most treasury management
systems.
Another area to review is work flow, as corporates move from paper to electronic work flow. In the
process they may automate controls to switch from manual checking to exception reporting and follow
up of exceptions.
Always Expect the Unexpected!
In these uncertain times, many corporates are dusting
off their scenario planning skills. Rather than just working
with a single business plan, companies are mapping
out different scenarios such as a double dip recession,
continued slow growth in the US and continued
boom or correction in China. Treasurers contribute to
the development of these scenarios. Suddenly bank
economists are much in demand and we need to have the
intellectual discipline to listen to and evaluate contrasting
views. As Nicholas Taleb recently pointed out, one man’s
black swan event can be another’s planned scenario: “A black swan for the turkey is not a black swan for
the butcher. For someone very naïve, an event may appear to be a black swan. But it is not a black swan
if you know it can happen and you hedge against it”5.
Treasurers are also users of the resulting forecasts. We need to address issues around what capital
structure is suitable across multiple scenarios, what cash and liquidity buffers are needed, and how
much we are willing to pay to hedge the more negative scenarios.
Treasury must also map out scenarios for its ecosystem of banks and markets. What will we do if
regulators force corporate FX onto organised exchanges, and how will we fund the possible margin calls?
Asian treasurers, who have tended to rely on bank debt rather than bond markets, may need to study
bond markets if Basel III really impinges on bank balance sheet availability. Similar risks exist for western
companies using bank revolvers to secure commercial paper issuance.
5
www.businessweek.com/investor/content/jul2010/pi2010078_530571.htm
Effective Cash Management: Key Factors in
Addressing Business Liquidity
Ankita Tyagi, Research Associate, Financial Management and Governance, Risk and Compliance (GRC) practice,
Aberdeen Group, Boston, Massachusetts
• Good cash management practice means the judicious use and retention of cash to meet business
needs and ensuring liquidity to support an organisation’s objectives.
• Corporates which may have been sceptical prior to the credit crisis are now recognising the
strength of cash management capabilities.
• Three key factors – a tight credit market, a no-growth economic environment and concerns over
liquidity – have brought cash management to the forefront for many organisations.
• Leading companies are aggressively exploring technological solutions and seeking ways to
streamline their existing operations.
W
hat is cash management and why is it important? At first glance, cash management seems like
a simple concept that is not vague enough to elicit the same level of intrigue as, say, business
performance management, enterprise performance management or customer relationship management.
As it seems self-explanatory, many organisations feel comfortable overlooking this aspect of strategic
management. Corporates assume that, when the need arises, they will be able to swiftly implement
cash management initiatives and generate sufficient cash to meet their impending needs. However,
this approach has shown itself ineffective over time. To truly benefit from effective cash management,
executives should have processes and capabilities in place that align with their strategic initiatives so that
they can extract liquidity from their financial value chain.
So what does good cash management practice entail?
Cash management refers to the judicious use and
retention of cash to meet business needs, including shortterm operational needs, and ensuring liquidity to support
an organisation’s objectives. Effective cash management
also stresses the importance of maintaining optimal cash
reserves that support unexpected operational and capital
expenditure requirements. In 2008 and 2009 there was
tremendous focus on cash reserves and liquidity levels across many organisations. Companies that
stood the test of time served as a testimony to having an effective cash management practice in place
to address liquidity issues and to sustain businesses in a hostile economic environment. Organisations
which were once sceptical of investing in cash management solutions are now embracing these
initiatives.
A Balancing Act
According to a 2009 report by the business research firm Aberdeen Group – entitled “The 3-Part
Balancing Act of Cash Management: Optimising the Financial Value Chain” – 82% of the companies
surveyed increased their focus on cash management initiatives to respond to the global financial credit
crisis and economic downturn. 41% implemented new technology or software solutions to improve their
cash management capability over the previous year as a precautionary measure. The tight credit market
was cited as the primary reason for undertaking such initiatives. A no-growth economic environment
was the second key driver, especially for small and medium-size companies. Additionally, large-size
companies were also grappling with concerns over liquidity, including the ability to secure loans. These
three key factors brought cash management to the forefront for most corporates, leading them to reevaluate their current practices and to adopt measures to reduce costs, especially those related to
operations.
Of those surveyed, 31% indicated streamlining and automation of cash operational processes and
expansion of the payment cycle by lengthening days payable outstanding (DPO) as the top two strategic
actions. By streamlining and automating cash operational processes, companies hoped to achieve
a scalable level of efficiency which, in turn, would reduce costs and execution time. The underlying
motivation for these new measures was the companies’ desire to optimise their cash conversion cycle
times to increase cash in hand and to enable re-investment.
At the time of the Aberdeen study, 42% of respondents
relied heavily on manual systems and spreadsheets for
cash management. Considering the complex nature of
most functions, and the ever-evolving buyer-supplier
relationship, spreadsheets are consistently being
assessed on their efficiency and reliability in documenting
transactions and tallying cash positions. For small
organisations with simpler, less intricate operations,
spreadsheets may be effective, but for large organisations
involving complex workflow structures, spreadsheets
may not offer sufficient functionalities. Additional tools
may be needed to increase inter-departmental visibility and access to the organisation’s cash position. In
fact, according to the study, overdependence on manual or paper-based processes was viewed as one
of the top issues by 36% of the companies. Companies indicated that in order to keep up with evolving
markets and expectations, they must embrace automated cash management solutions and employ
them concurrently with spreadsheets.
Unfortunately, automation comes with its own set of challenges. Workforce and labour unions often
view it as a substitute for, rather than as a supplement to, the workforce. However, the intention in
automation is to facilitate work and to limit employee participation in mundane tasks, allowing companies
to use their human capital to address more complex, analytical problems which cannot be resolved by
technology alone.
Best in Class
At the time of the study, it was found that only 29% of the corporates had fully automated procure-topay – accounts payable (A/P) – systems in place, and only 25% of corporates had fully automated orderto-cash – accounts receivable (A/R) – systems in place. This is further evidence that most organisations
still relied on manual processes.
On the other hand, corporates that deployed automated A/P and A/R solutions to support their cash
management initiatives emerged as “Best-in-Class” organisations (top 20% of respondents). These
companies were notable for possessing a days sales outstanding (DSO) period of 21 days, compared to
53 days for the industry average. In addition, these leading companies had an 84% cash flow forecast
accuracy rate, compared with 49% for the industry average.
“Best-in-Class” companies were able to achieve success in cash management initiatives by making
prudent investment choices in process and technology. 67% of these leading corporates streamlined
and automated operational transactions to establish a more favourable cash position, compared to
42% for the industry average. Most of the leading corporates (69%) also monitored forecast accuracy
on a regular basis, compared with only 31% for the industry average. Consequently, 69% of these top
corporates were able to perform detailed planning for short-term cash, enabling them to establish more
realistic expectations and defining strategic objectives.
The “Best-in-Class” organisations were also found to have a well-rounded approach to different aspects
of the business. Besides focusing on process and performance strategies, they also placed strong
emphasis on organisational communication. A majority (64%) of these leading companies standardised
inter-departmental communication methods related to cash management, compared with only 38%
for the industry average. To support myriad cross-functional, inter-departmental layers, top companies
understood the importance of having effective communication channels across different departments to
support strategy planning and execution.
Smart Investment
According to the study, “Best-in-Class” corporates also led the way in investment in technology
solutions. Over half of these top corporates (52%) had cash-reporting and forecasting solutions in place,
and about 42% of these corporates also had an integrated workflow compared with only 20% for
the industry average. The ability to forecast accurately the amount of available cash at any given point
enables companies to better plan and execute organisational initiatives. Corporates unable to do so
might unnecessarily keep larger reserves, leading to idle cash which could have otherwise been invested
to yield greater returns or to support additional organisational functions.
The study also found that 75% of the leading corporates used online portals for balance reporting,
forecasting and account reconciliation, compared with 53% for the industry average. This offered a
Interestingly, over half (53%) of the respondents were aware of the qualitative value offered by
automated A/R solutions and believed in their ability to positively impact cash flow (such solutions
enabled companies to collect cash from customers and keep overdue loan payments in check), yet less
than a third of these respondents adopted automated A/R solutions. The inability to justify the return on
investment was found to be the largest barrier to adoption.
distinct competitive advantage as they were better tuned and equipped to address growing monetary
needs. These top companies were also able to effectively handle complexities associated with having
multiple banking partners – each of which had its own proprietary connection system – all of which have
traditionally been cost-prohibitive and time-consuming.
Despite all these comparisons, top-performing corporates have their fair share of challenges when
unlocking liquidity from their financial value chains. And in a macro scheme, there are still some issues
that need to be addressed across all industries. While straight-through processing (STP) is becoming
more acceptable, it still has a fairly low adoption rate despite its value. Fully automated cash channels
such as STP simplify communication between internal systems and financial partners. However,
because of the cost involved, this initiative has been placed on hold by many organisations. Many are
just gaining their footing in the new economic climate and as much as they would like to undertake
new cash management initiatives, have limited budgets to implement or support new processes.
Some organisations are aware that investing in such initiatives today can lead to a better cash position
tomorrow – but generating cash today remains a top challenge. Forecasting accuracy was another
top challenge cited by many companies, once again resulting from lack of sufficient funds to invest in
necessary analytical tools.
Conclusion
Cash management has certainly gained momentum in the last couple of years due to an increase in
demand by executives to understand their company’s cash position and to achieve greater liquidity
forecast accuracy. Leading corporates are aggressively exploring technological solutions and seeking
ways to streamline their existing operations. However, corporates still continue to struggle with STP
and SWIFT networking. It is hoped that in years to come, more corporates will adopt these platforms to
promote standard global processes and achieve greater congruence between reporting and accounting
standards. Effective cash management initiatives can offer tremendous value to corporates and their
stakeholders by continuing to help them realise profits in challenging financial times.
A Pragmatic Look at
Process Centralisation
after the Global
Financial Crisis
• The trend towards centralisation has
acquired a new momentum since the
financial crisis.
• During or immediately after a recession is
the ideal time for corporates to consider
centralisation so as to maximise net
profitability arising from any turnover growth.
• Of the top ten countries for centralised
activities, seven are in Asia.
• Centralisation reduces cost, tightens risk
management and streamlines processes,
but also generates numerous other
advantages, such as improved cash visibility.
Anthony CK Ho, Vice President, and Mohammed Omer Murtza, Assistant Vice President, Product Management,
Payments and Receivables, Global Cash Management, Asia Pacific, HSBC, Hong Kong
A
sia’s resilience in the global financial crisis has helped to position it as a region of comparatively
reduced risk across a range of business activities. This resilience can be attributed in part to the
diversity of the region, which continues to present opportunities as well as its fair share of challenges.
For both corporates and financial institutions, this translates into a need for creativity where concepts
such as centralisation are concerned.
Corporates have set up operations in Asia for its business potential as well as its low costs. Although
the trend towards process centralisation since the turn of the century has thrown up successful and less
successful examples, this trend has not abated but has actually taken on new meaning and drive since
the financial crisis.
At a time of uncertainty, organisations look inwards for their “golden” profit – that earned by increasing
the margin between revenue and costs. Revenues in a recession face high pressures, so the corporate
sector is left with little choice but to consider reducing its costs. In fact, the global financial crisis has
shifted corporate priorities. Instead of concentrating on business expansion, identifying investment
opportunities etc. Post-crisis, corporates have been forced to go back to basics. They have therefore
tended to focus more on identifying ways to improve internal risk management at the same time as
reducing operational costs and generating margin uplift. Obviously, establishing a Shared Service Centre
(SSC) is a strategy that addresses all these objectives.
What is a Shared Service Centre?
An SSC is a centralised unit providing business services to other parts of the organisation. The SSC
executes business processes (typically administrative and financial) on behalf of other departments, thus
freeing up those departments to focus on their core business activities.
The Benefits of Shared Service Centres
Establishing an SSC or a payments factory delivers the following benefits:
Improved operational risk management
Having a centralised and standardised process flow model allows compliance officers a holistic view
of the business processes within an organisation. In fact, establishing an SSC or payments factory
creates a centre of excellence that facilitates the sharing of best practice. This enables the team to
identify possible process loopholes and to develop appropriate risk mitigation procedures.
Furthermore, implementing new risk mitigation procedures or introducing new process steps in an
SSC or payments factory is far simpler than doing so in a distributed environment.
Improved operational efficiency
Duplicating the same team across multiple locations is a waste of resources. By contrast, with an
SSC or payments factory model, various operational processes are centralised and standardised.
Apart from gaining efficiency from the consistent application of processes across the company, an
SSC or payments factory requires fewer interfaces, because it has centralised the processes into one
single system.
Depending on the size of the SSC or payments factory, the corporate may achieve a better
segregation of tasks. Under a distributed model, individual offices may only have small operational
teams and the same person will have to prepare, review, reconcile and perhaps even authorise an
instruction, which increases the risk of errors and internal fraud. On the other hand, under an SSC or
a payments factory model, the corporate may be able to segregate the process into smaller discrete
steps so that different groups of operatives can focus on individual process steps. This will assist in
minimising errors as well as improving straight-through-processing (STP) rates and reducing repair
fees.
Concentration of expertise
The scale benefits of an SSC or payments factory make it viable to employ specialist expertise
that can be shared regionally or globally, which could not be justified under a distributed model.
Furthermore, special training or development programmes can be designed to develop such
expertise in-house in a cost effective and efficient manner.
Reduced cost
An SSC or payments factory generates cost savings in a variety of ways. One of the most obvious
is the elimination of labour duplication achieved by centralisation. Rather than multiple departments
or business units executing processes individually, scale economies in terms of full time equivalents
(FTEs) can be achieved.
Similar rationalisation benefits apply to technology. Centralising the technology associated with a
business process reduces the number of interfaces in the corporation, as well as vastly simplifying the
development and roll out of new technology and reducing the cost of ongoing in-house IT support. In
addition, the concentration of processes in an SSC or payments factory may make it worthwhile to
invest in new technology for specific tasks (previously undertaken manually in multiple locations) that will
further increase efficiency.
As regards financial costs, centralisation can be used to align the purchase-to-pay and order-to-cash
processes more effectively. This reduces the working capital requirement together with its associated
costs, either through better returns from surplus liquidity or through reduced debit interest on short-term
borrowings.
Five Questions: What, Where, When, Why and How?
Any pragmatic approach for centralising a corporate’s operational processing necessitates correctly
answering five key questions – the “four Ws and one H”.
What to Centralise
One of the major lessons to emerge from the global financial crisis has been the value to corporates –
in terms of both cost and risk - of centralising their business processes. However, centralisation cannot
be applied on an indiscriminate basis; while many processes can be centralised, the level of benefit
achieved by doing so varies considerably from process to process. Therefore, any corporate looking to
centralise business processes needs to prioritise those that will generate the greatest benefits by being
centralised.
When undertaking this prioritisation, the corporate can also cast its net beyond the immediate company.
Processes across different entities or subsidiaries within the same group can also be centralised into an
SSC or payments factory, thereby further maximising the centralisation benefits to the organisation as a
whole.
Where to Centralise
One word: Asia. According to the 2009 “Global Services Location Index™” produced by management
consultants A.T. Kearney, of the top ten countries for centralised activities, seven are in Asia. The
index takes into account three factors: financial attractiveness, skills and their availability, and business
environment. But none of the three factors outweighs the other two; all are equally important.
In our experience, China and Malaysia are the most popular places to establish an SSC or a payments
factory, followed by the Philippines. Though India currently ranks outside the top three, we definitely see
an increasing number of corporates looking at establishing their SSC or payments factory there.
When choosing a centralised location, the A.T. Kearney index ranks financial attractiveness as a major
consideration, but cost reduction should not be the sole reason for centralisation. Other important factors
include:
Prior experience of the organisation in conducting the activities to be centralised;
Integration with corporate infrastructure and culture;
Time zone differences;
There has also been one specific development in the past five years that has made it easier for
corporates to work towards centralisation and harmonisation of their activities. This has been in the
area of connectivity, where a service such as SWIFTNet, together with the ISO 20022 XML message
standard facilitates standardisation. Corporates can now have access to all their account information
through one format, as well as the ability to send instructions to various banks in a globally standardised
manner.
Political stability;
Transport and technology; and
Language skills.
When to Centralise
For corporates looking to reduce operational costs and improve risk management by standardising
processes, now is the opportune moment to consider a centralisation strategy. With the financial world
undertaking numerous centralisation activities over the past five years, understanding exists in terms of
knowledge and experience.
During or immediately after a recession is the ideal moment to consider centralisation, as it will facilitate
the increase in the corporate’s transaction count likely to arise as business sentiment recovers. Even if
the recovery is slower in developing, any centralised activities will nevertheless assist in the meantime
by reducing costs .
Why Centralise
There have been various arguments over the pros and cons of centralisation. While the benefits of
centralised processes have been extensively discussed in various research papers, the centralised
approach does not necessarily work for all businesses. Even if a corporate has all the characteristics
that indicate that centralisation is the right strategy, the benefits achieved ultimately depend upon both
the quality of implementation and the organisation’s overall commitment to the change. Furthermore,
centralisation is not just about a discrete project; if it is to be truly effective, it has be an ongoing strategy
that always evolves to accommodate both the latest best practice and any changes in the corporate
business model.
How to Centralise
Although there is no standardised checklist for identifying which processes to centralise and when, a
good first step is a detailed review of all corporate activities and their classification as either possible
“central process candidates” or as “highly dependent on local expertise”.
A phased approach is always helpful in maximising benefits. Identification of potential “early movers”
amongst the “central process candidates” assists in building momentum; once these are successfully
implemented they can be a valuable tool for gaining buy-in from business units and departments for
centralising further processes.
Some Considerations
For corporates that are interested in establishing an SSC or payments factory, being aware of some of
the practical issues that can crop up during the centralisation process will assist the implementation.
These include:
Short-term discomfort: There will always be resistance to change and discomfort while new
processes are adopted and protocols established.
Risk of inadequate fulfilment of service levels: Commitment to the targets of the centralised
approach will help people to feel connected to the initiative and contribute more towards the success
of the deliverables.
Contingency or concentration risk: Although corporates – as well as participating banks –have
contingency plans for their IT systems and connectivity equipment, allowance should be made for
the concentration risks inherent in centralisation. Any disruptive incident that affects resources on
a large scale will result in prolonged service disruption. The key here is to strike a balance between
mitigation of risk versus the projected benefits of centralising the activity. For example, splitting
personnel across two or more sites will assist with this.
Project overruns – time and/or costs: Perhaps the most critical consideration. Cost overruns can
be experienced even with a project that is delivered on schedule, but when a project timeline slips,
cost overruns are guaranteed. It should be appreciated that centralisation projects do not happen
overnight and that a phased approach of centralising one activity at a time can do much to reduce the
likelihood of such slippage.
Conclusion
Developments in connectivity in recent years have made it easier for corporates to work towards
centralisation and thereby harmonise their activities. Many have opted to locate their SSCs or payments
factories in Asia and have thereby achieved both cost reductions and enhanced risk management.
For those corporates that have yet to take this step, now looks a propitious moment. As economic
activity continues to recover, centralisation offers a route to maximising the profit potential of this growth.
Grasping that opportunity may not be a trivial task, but it is an eminently achievable one; any corporate
with a commitment to change and an understanding of the sort of practical issues outlined above is well
placed to succeed.
Treasury: Business
Process Outsourcing
• The treasury function has long been a
popular candidate for outsourcing by
companies.
• Banks have invested heavily in treasury and
cash management tools to meet companies’
needs.
• “Treasury business outsourcing” and
“treasury business process outsourcing” are
the two main types of treasury outsourcing.
With the latter, the company will maintain
discretion over areas such as funds and risk
management.
• Outsourcing does not have to involve a
bank: activities can be outsourced to a
non-bank treasury specialist or to one’s own
parent company.
Vipul Agrawal, IT Consultant, and Sumesh Gopurathingal, Business Analyst, ITC Infotech India Ltd., India
T
reasury is the heart of any organisation, but the cost and effort involved in operating one is enormous.
Organisations sometimes find it profitable not to maintain a treasury of their own, so they decide to
outsource their treasury activities to an external vendor. The type of outsourcing depends on various
factors, such as the organisation’s competencies in treasury business, its appetite for risk, country
regulations and the organisation’s acceptance of outsourcing. Based on these factors the organisation
can either go for treasury business outsourcing or treasury business process outsourcing. This article will
cover some aspects of business outsourcing and business process outsourcing with more emphasis on
the latter. The article will also cover various structures of treasury business process outsourcing in a big
conglomerate.
Background
During the mid-1990s many companies, especially in the US and Europe, realised that they should be
concentrating on their core business: anything that was not core to their business should be outsourced.
High on the list of things that could be performed outside of the corporation were certain treasury
activities, notably payments and receivables. Corporations were looking to outsource these activities
to reduce expenses (and banks were looking to insource these activities to increase revenues). Many
organisations started outsourcing their payable functions to a bank or other financial institution by
transmitting a payment file including cheque, wire and automated clearing house (ACH) transactions.
The organisations also started receivable outsourcing, the most common of which was use of lockbox
services. Organisations in the US were front-runners in outsourcing their treasury functions, though
European organisations soon caught up.
The current trend in outsourcing among corporate treasurers is far more positive than a decade ago.
Treasurers are increasingly accepting the fact that specialised consultants are the best bet for their
treasury functions. They can apply their experience of a wide range of companies in enabling lower
operational risks, boosting productivity and aligning IT investments with strategic goals. With this
function being outsourced the organisation can then focus on its core business.
During the recent downturn treasurers were mostly concerned with preserving capital and reducing
counterparty risk. However, with government backing the global cash management market has been
propped up. Taking a cue from this, many banks have invested heavily in their treasury and cash
management businesses, rolling out new functionality, particularly in the area of liquidity management.
Companies have also started to feel more comfortable about outsourcing their treasury functions. This
outsourcing can be classified as:
1. Treasury business outsourcing; and
2. Treasury business process outsourcing.
In treasury business outsourcing, a company outsources all its treasury functions to a bank or some
other organisation. Below is a list of activities that are typically outsourced:
Inter-company borrowing/lending;
Inter-company netting;
Cash pooling;
Foreign exchange hedging;
Administrative and operational functions, such as payment execution and bank account
administration;
Accounting and reporting of banking and payment activities;
Treasury system operations and administration, and
Transaction execution, such as foreign exchange and payments.
Under treasury business outsourcing the company outsources end-to-end treasury activities to an
outside entity. The decision to invest surplus funds and to take all the positions is with the outsourced
partner. Two examples of companies outsourcing the entire treasury business are IT service companies
and new manufacturing units.
Treasury Business Process Outsourcing
Under treasury business process outsourcing, the company itself makes all the decisions with respect to
treasury, such as:
How and where to invest the surplus funds (funds management); and
How to manage the exposures of the company (risk management) etc.
However, the company outsources the process of executing the above decisions to a third party,
preferably to a bank. The activities which are outsourced include the following:
Executing investment decisions;
Completing all necessary paperwork;
Confirmation and settlement of deals; and
Accounting and reconciliation of treasury activities.
In short, treasury business process outsourcing involves outsourcing the back office operations of a
treasury and all the decisions are kept with the organisation.
Outsourced Partner
There are many companies to which treasury processes can be outsourced. They can be either a bank
or a non-banking company specialising in treasury process outsourcing (e.g. AIB International Financial
Treasury Business Outsourcing
Services1). The factors which a company needs to consider before choosing a particular partner are as
follows:
The overall business objectives of the company;
The requirements of the company (business or business process outsourcing);
The level of experience and expertise of the outsourcing partner; and
The cost and benefits of outsourcing.
Benefits of Treasury Process Outsourcing
There are certain benefits which accrue to a company by outsourcing its treasury processes to a
specialised vendor. Some of these benefits are:
Execution of various decisions of the treasury (deals, investments etc.) involves transaction costs. As
the service provider handles these activities in large numbers, the transaction costs are low when
compared to the costs which a company would incur if it executed these decisions individually.
The company benefits from the experience and expertise of the service provider, especially a bank
which has the experience of running its own treasury operations. For example, the bank may run
huge treasury operations and handle complex deals. As banks are one of the most regulated sectors
of an economy, they are also well aware of the regulatory requirements that need to be complied
with. By outsourcing treasury activities to such a partner, the company is assured of regulatory
compliance, where required.
In certain countries, non-financial entities are barred from operating in certain markets. For example,
in India non-financial entities are not permitted to participate in call money markets. In such a
scenario, outsourcing the treasury processes to a bank would help these entities to tap the call
money market.
Another important benefit to a corporate is the reduction in costs, both direct and indirect. The
company saves on costs such as that involved in hiring capable individuals to staff various aspects of
the treasury. It also saves the huge cost involved in creating and maintaining IT systems.
Outsourcing also provides the company with the necessary adjustability to ramp up or down the
scale of operations based on its business requirements.
Challenges
There are certain challenges or concerns related to the outsourcing of treasury operations.
As mentioned at the beginning of this article, as treasury is strategically vital for any company, one of
the biggest challenges is to decide the level of outsourcing, or whether to outsource at all.
Another challenge is the perceived loss of control due to outsourcing. This can be addressed by a
well structured relationship with the outsourcing partner. The roles and responsibilities (reporting,
management information system [MIS] etc.) should be well defined and agreed upon.
For companies with offices in different locations, especially overseas, finding an outsourcing partner
with expertise in all these countries might be difficult.
1
Headquartered in Dublin, Ireland, AIB International Financial Services is a provider of outsourcing services to corporate
treasuries internationally. See www.aibifs.com.
Outsourcing of Treasury from
Subsidiary to Parent Company
Despite the above-mentioned benefits from treasury process outsourcing, many large conglomerates
operate their treasury in-house. It is interesting to study the manner in which the treasury of some large
conglomerates, especially those with multiple subsidiaries, is organised.
In a centralised structure there is a centralised treasury department which makes all the decisions on
its own. Regional offices have little say in decision making. A centralised treasury department has its
own advantages and disadvantages, which fall outside the scope of this article. However, this article will
cover one of the structures between a parent company and subsidiary treasury department, which can
be described as a “hybrid centralised treasury”. In this system the treasury departments of the parent
company and subsidiary have distinct roles to play.
Figure 1: Roles in a Hybrid Centralised Treasury
Treasury department of subsidiary
Corporate treasury department
The treasury (in some cases simply called the
finance department) makes all the important
decisions, such as:
Where surplus funds need to be invested;
and
How to hedge the exposure of the subsidiary,
or risk management. That is, it decides
the type of cover it wants for its exposure
(forwards, options etc.).
The role of corporate treasury is to execute
the decisions of the subsidiary’s treasury. This
includes:
Taking the necessary cover for the exposures
taken by the subsidiary;
Doing the necessary documentation;
Accounting, settlement and reconciliation of
all the transactions; and
Providing the necessary MIS to the
subsidiary.
Source: ITC Infotech India Ltd
Once the treasury of the subsidiary has made its decisions it communicates the same to the central or
corporate treasury, along with information such as expected inflows and outflows. Communications
between the treasury of the subsidiary and the corporate treasury can be done via an interface provided
by the corporate treasury, which is linked to the systems of the corporate treasury. This interface allows
the subsidiary to promptly send requests to the centralised team. It also allows the subsidiary to receive
reports periodically and on an as-needed basis.
The treasury structure of a big conglomerate can be either centralised or de-centralised. Traditionally,
companies implemented de-centralised structures with a global treasury office and number of regional
offices. The global treasury office would publish general guidelines and compliance requirements to be
followed by regional offices. However, soon companies started to consider centralised structures.
The structure between a subsidiary and its corporate treasury can be represented in Figure 2.
Figure 2: Hybrid Centralised Treasury
Markets
1. Investment of funds
2. Taking the covers for exposure
Corporate
Treasury
1. Provides exposure
2. Details of inflows and outflows
3. Documents for cover
4. Type of cover
1. Treasury System Interface
2. MIS
Treasury of
Subsidiary
Source: ITC Infotech India Ltd
There are certain benefits arising out of this kind of hybrid centralised system:
As the subsidiary has a better control of its inflows and outflows, it is in a better position to decide
about the cover it needs for its exposures;
The transaction costs can be reduced as the corporate treasury can execute multiple transactions
together; and
The cost of IT systems and manpower is reduced as these are located at one place i.e. corporate
treasury.
Conclusion
There are multiple factors which a corporate (subsidiary or otherwise) needs to take into account
before deciding on the model of outsourcing. If the organisation has or can afford to employ competent
individuals, then it can go for treasury business process outsourcing. Otherwise, it is better to choose
treasury business outsourcing. A large conglomerate with many subsidiaries and a treasury of its own
should find it beneficial economically and in terms of process to adopt a hybrid centralised treasury
structure.
The financial crisis and the credit crunch that followed may have forced many corporates not to choose
outsourcing for their treasury operations. However, with the world economy slowly getting back on its
feet and with advancements in the field of cost-effective web technology, treasury outsourcing may be
back in companies’ strategic plans.
Damian Glendinning, Vice President and Treasurer, Lenovo; President, Association of Corporate Treasurers,
Singapore
•
•
•
•
Factoring is an old – and not very glamorous – approach to funding.
For a long time, it was viewed as expensive and inefficient.
But more and more corporates are doing it – and banks want to join in.
There can be significant benefits for both sides.
T
he global crisis left the financial services industry scrambling for new solutions. Or, in many cases,
looking to re-apply old solutions that had sometimes been discarded in favour of more recent
inventions – inventions that, with hindsight, we might have been better without.
Factoring is one such product. In the heady years of
easy credit, a corporate seeking to use its receivables
as a source of funding would tend to go for receivables
securitisation. Under this approach, a corporates’ trade
receivables would be sold into a special purpose vehicle
(SPV), which would then issue bonds. Careful selection
of the receivables being put into the vehicle, and a degree
of over-collateralisation, would enable the SPV to secure a
credit rating considerably higher than that of the corporate seeking funding, and therefore cheaper funds
than were available through most forms of direct borrowing.
Does this sound familiar? Do the words “sub” and “prime” come to mind?
Although the underlying process used here is similar to the packaging of sub-prime mortgages into AAArated securities, the receivables securitisation market was less risky and better structured. There were
no major defaults or scandals around it. Despite this, the market basically disappeared with the financial
crisis. A very high percentage of these programmes were cancelled or reduced to nothing. Securitisation
continues to be used for credit card receivables – despite several scares – but this form of funding is
having a problem making a comeback.
So what are corporates doing if they want to use their receivables as a way of securing funding – and
why do it at all?
Cheaper Funding
It is easy to say why corporates use funding sources backed by receivables. The logic is simple. Providing
security has always been a way of securing larger lines and increasing credit limits. With receivables, if
your customers’ credit rating is better than your own – and this is true for many corporates – then why
not use their credit ratings rather than yours? With receivables-backed financing, investors have a double
security. They rely on your own credit worthiness, but they also have a back-up: if you fail to repay, they
can access your receivables. The benefit is obvious.
For financial institutions in a post-financial crisis world, the additional layer of security is one way of
meeting the more stringent requirements placed on them by their credit committees, under pressure
from the regulators. It also fits well with the new mantra: as banks seek to demonstrate that they are
funding real assets in a real world, this activity comes under the category of trade financing.
Other Benefits
So there are clear benefits for both parties. But receivables-backed funding has several other potential
benefits – for simplicity, the focus here will be on factoring, rather than other vehicles such as
securitisation.
Flexibility
One of the main challenges in funding is fitting the sources of cash to the needs of the company. Most
sources of funding, other than bank overdrafts, provide cash for a pre-determined period. But the
company does not necessarily need the cash for all that time. The objective of most treasurers is to only
borrow funds when they’re actually needed: the spread between the cost of borrowing and the return on
idle cash, or cost of carry, is a prime inefficiency in cash management. With any form of term borrowing,
there will be periods when borrowed cash is sitting idle, causing negative carry. With a five-year bond,
for example, negative carry can be incurred for quite long periods: you receive the cash when you issue
the bond – and you start paying the coupon on it – but your actual cash needs may occur at a different
time.
Factoring, on the other hand, varies directly with the business cycle. Usually, an increase in volume will
drive higher cash needs, as the business has to pay for raw materials and components to manufacture
the goods being sold. At the same time, the higher volumes will drive increased levels of receivables, as
these same goods are sold. Factoring almost automatically adjusts the level of funding to the cash needs
of the business: the higher receivables level will automatically increase the funding, thereby making cash
available to pay for the increased purchases. As business declines again, the funding will automatically
reduce – no cost is incurred paying for funding which will not be used.
Improved Balance Sheet Ratios
When factoring without recourse, the receivables are considered sold and are removed from the balance
sheet. Even if the factoring is fully disclosed, so users of the financial statements can adjust both debt
and receivables to undo the effect of factoring, in practice most banks and observers tend not to. The
result is a lower level of gearing and greater financial flexibility.
Provision of Credit Insurance
Again, with factoring without recourse, the factor is taking the credit risk. The factor will often be buying
credit insurance – but both the factor and the credit insurance company will usually be looking at your
receivables as part of a much larger overall portfolio. This enables both of them to take advantage of
natural risk diversification to reduce cost and, potentially, handle risk concentration issues that can be
quite thorny. By these means, it can be possible to achieve a higher level of risk transfer than may be
available by keeping the receivables on the books.
This service is not provided by all factors or receivables financing companies. But if they do provide
it, it is worth looking at. Many corporates find it a challenge to collect their receivables. Often, there
is an unwillingness to potentially damage customer relationships by appearing to be too aggressive in
pursuing customers for timely payment. A third party that has bought the receivables as a purely financial
transaction will tend to be much less influenced by this kind of relationship issue. The result is a better
payment timeliness performance. This usually comes at some cost to customer relationships – but the
fact that the collections are being performed by a third party allows the corporate selling its receivables
to distance itself, to some extent, from the activities of the factoring company.
Creative Use of Factoring
Above are the traditional benefits of factoring. But there are other, more imaginative ways of using it.
Providing Extended Payment Terms
Your own company might not be able to fund extended customer payment terms, or might not want to,
for example, to preserve certain balance sheet ratios. A factoring company might be willing to provide
the extended payment terms, without recourse – at a cost, of course. This can be a big plus for the
business.
Monetising the Cost of Receivables
For most treasurers, it is a challenge to get the business
units to understand the cost of carrying receivables –
particularly extended payment terms. Factoring means
that the cost of the receivables is turned into a charge,
which can easily and accurately be allocated back to the
business units, and which the business units understand.
The decision to offer extended terms, or to improve
relations with a customer by not insisting on timely
payment, now has a cost that can be integrated into a simple business case.
Smoothing Irregular Payment Patterns
Some customers insist on paying according to certain patterns – for example, on a specific day each
month. Factoring can be a way of avoiding the negative impact on days sales outstanding and cash flow
caused by this behaviour – and, again, the sales team get to see the cost.
Collection Services
Freeing up Sales Teams’ Time
This benefit is not always immediately obvious. As most companies end up having to involve their sales
teams in credit and collection issues, using a factoring company to outsource the credit and collection
decisions can save up to 20% of the time of the sales team, and free them to do what the company
really needs – sell.
Downsides
So, what are the drawbacks to factoring?
Cost
People traditionally view factoring as expensive – and it can be. Many considerations go into determining
the price, but, as always, it helps to break the price down into its components:
cost of funds;
credit insurance;
collections service; and
administration and profit for the factor.
Most factors will resist providing this breakdown. If they do, the usual tactic is to do your own estimate
of how the numbers are made up and tell the factor this is what you will use if they don’t give you
something better. More important, when looked at this way, a number that can seem large in absolute
terms starts to look more reasonable – especially if it enables the company to achieve a lower level of
gearing.
Measurement System
As with many such products, the use of factoring can cause distortions in the measurements. For
example, it can cause funding costs, which may not normally be part of what a business unit is
measured on, to appear in their expenses line. While this is clearly appropriate for the credit insurance
and collections portions of the factoring charge, it may be necessary to adjust the measurements for the
interest component.
Negative Customer Reaction
This can be an issue – especially if the customers intend to pay late and the factor will not let them do
this. This is when you see what really matters to the company – and remember, if you have a lot of late
payers, the sales team will be spending a lot of time trying to get them to pay. Freeing them from this
task is a big plus.
Dependency on the Factor
If the agreement involves outsourcing the collections and the credit insurance, it can be a major issue
if the service is suddenly withdrawn and the processes have to be brought back in house quickly. This
happened when some factoring companies abruptly withdrew their funding during the recent financial
crisis. There is no easy answer to this – it is important to maintain good relations with the factoring
company and be alert to any signs of disengagement.
There are always things that can go wrong. One of the biggest challenges can come, ironically, from
the corporate’s own management and measurement system. Many corporates reduce their exposure
to receivables by giving early payment discounts. When looked at from the treasury point of view,
these are often extremely expensive: a figure often
quoted is 0.5% for 15 days – that works out at 12%
annualised. This is extremely expensive funding and risk
management. But, in many corporates, this is accounted
for as a revenue reduction, while a factoring fee will
show up as a controllable expense item. Usually, the
expense line receives the most focus – so, a potentially
cheaper solution will often be ignored in favour of a more
expensive one.
It is important, as with any supply contract, to have a clear understanding with the factor as to what will
be done by whom. Regular reviews and reporting are essential: this has to be viewed by both sides as a
partnership.
Finally, if a corporate opts to use factoring without recourse, it can find that the factor’s credit appetite for
its customer’s risk may become a limiting factor in its own growth. A factor, like any financial institution,
will almost always have a lower credit appetite for a given customer than the manufacturer. As many
bankers put it: “If you, the manufacturer, are not prepared to take the credit risk when you are earning
the gross profit margin, why would I, the banker, take it when all I am earning is the spread?”
Menu-Driven Approach
The solution to a lot of these problems is to be clear on what your own objectives are and to be flexible.
Factoring services can be tailored to the customer’s needs: it can be with, or without, recourse. It
can even be with partial recourse: the factor takes the credit risk up to a predetermined level while
the seller takes the risk beyond that. It can involve a collections service but it does not have to. Many
customers prefer to do the collections themselves, so they do not have to involve a third party in the
relationship with their customers. In this situation, the factor buys the receivable but appoints the seller
as his collection agent. The factor can settle the invoices immediately when they are issued, thereby
maximising the funding period. Or he can settle on the original due date – or on any other date agreed by
the two parties.
In short, factoring can be a surprisingly flexible tool. Naturally, many providers prefer to sell their preexisting structure – for very good reasons, they prefer to have a standard product with standard
processes and documentation. Some have systems that are more flexible than others – this is an
important consideration when looking at potential providers.
But, in the end, as with most things, it is surprising what can be achieved if you are prepared to
challenge, negotiate and innovate.
Pitfalls and Areas to Watch Out For
Conclusion
Factoring may seem unfashionable – frankly, it even has a somewhat negative connotation, as it is not
considered to be an advanced funding technique, and it even suggests that the corporate that uses it
may have problems funding itself.
However, a closer examination, linked with some hard negotiating with the suppliers, can reveal a
surprisingly flexible and cost-effective funding tool. It may not be the right tool for all corporates in all
circumstances, but it is definitely worth a close examination.
Forfaiting: A Solution
for Volatile Times
• In periods of economic and political
instability, exporters involved in international
trade can feel vulnerable.
• A mistaken view among some Asian
corporates with established businesses is
that they need not worry about customer
default or other risks.
• Corporates have to diversify into new
markets in order to grow, which involves
finding and dealing with new buyers
overseas.
• The risks involved can be varied and
unpredictable – a tried and tested solution to
managing these risks is forfaiting.
Vin Sing Chay, Director of Business Development, Asia Forfaiting Centre, Trade and Supply Chain, HSBC, Singapore
I
n today’s volatile economic and political environment, a situation that has long been regarded as
stable and safe can suddenly turn negative. Consider the various “mini” hot spots that occurred
between 2009 and 2010 when there were credit concerns regarding Dubai that began to spread to other
countries, including Portugal, Italy and Greece, while countries such as Thailand went through a period of
political instability.
These are unknowns and, during such times, exporters involved in international trade feel vulnerable. On
the one hand, these exporters have signed contracts and are committed to delivering their goods, while
on the other, if the buyer’s country experiences volatility in its political or economic environment, then
the exporter is exposed to the risk of default, thereby jeopardising years of hard work and profitability as
a result of perhaps just a few non-payments.
In addition to the risk of buyer default, exporters also face a host of related issues including liquidity
constraints, bank borrowing and foreign exchange exposure. It is therefore essential for exporters to
find a financing solution that will provide business continuity and ensure confidence that they will not be
exposed to the risk of non-payment after they have fulfilled their delivery responsibilities.
A Mistaken View
A common view among Asian corporates with established businesses and long-standing relationships
with their buyers is that they need not worry about customer default or other risks. However, this is
unfortunately not the case. Exporters try to manage credit risk by choosing their buyers very carefully,
either through referrals or personal contacts. However, in order to grow the business, corporates have to
diversify into new markets, which involves finding and dealing with new buyers overseas.
Furthermore, exporters also need to minimise operating costs. This can be achieved via economies
of scale – for example, by increasing production – but some exporters will try to reduce financial costs
by avoiding the use of traditional letters of credit or standby letters of credit and instead opt for less
expensive and more convenient forms of settlement such as open account.
While it is reasonable to assume that the greater the risks, the higher the profit margins for the exporter,
the risks involved can be varied and unpredictable. For example, risks such as currency fluctuation,
imposition of capital controls and political upheaval all add to the uncertainty. Natural disasters such as
flash floods and earthquakes are also very real risks that can affect the buyer’s ability to pay. The net
result is that any of these risks can cause a sale to go bad, which, if substantial, could potentially wipe
out an entire year of profits – or even threaten the corporate’s continued existence.
A Solution
Fortunately, there is a tried and tested solution to managing these risks economically, which has been
available from leading banks in Asia Pacific for more than 25 years. That solution is forfaiting, a name
derived from a French word meaning to surrender or relinquish the rights to something.
When using forfaiting, an exporter delivers goods or services to an importer and, in return for a cash
payment, surrenders to the bank (the forfaiter) the rights to any claim for payment. The exporter receives
the cash payment on a without-recourse basis and all the risks associated with the transaction are
essentially transferred to the bank. This forfaiting arrangement delivers several important benefits to the
exporter:
The exporter is relieved of all political, credit or commercial risks associated with the transaction.
By receiving cash up front, the exporter has improved its cash flow and access to funds.
As payment is made on a without-recourse basis, the receivable is now removed from the exporter’s
balance sheet.
The exporter’s financial statements also benefit, as no additional bank borrowings are required.
Most importantly, by using forfaiting, the exporter gains a competitive edge by being able to grant or
extend the credit terms required by buyers without worrying about the cash and other risks associated.
How Forfaiting Works
An acceptable forfaiting risk usually originates from one of three areas:
sovereign risk;
commercial bank risk; and
prime corporate risk.
Subject to the final obligor’s risk from any of the above groups being acceptable to the bank, a forfaiting
transaction can be effected by using one of the following commonly encountered debt instruments:
bills of exchange;
promissory notes;
usance documentary credit (DC, also known as letter of credit);
standby letters of credit and letters of guarantee;
deferred payment DC (without drawing of drafts); and
aval on negotiable instruments.
The credit term of a forfaiting transaction can vary widely from as little as 90 days all the way up to 10
years, if the underlying country and credit risk is acceptable.
Advantages
Forfaiting is sometimes confused with DC discounting – the key difference is that DC discounting is
typically conducted with one of two options, the second one being the most common solution offered
by most banks:
Full recourse – the exporter is ultimately responsible for all non-payment risks associated with the
receivable.
Limited recourse – the exporter is only covered for credit and/or country risks, but not for commercial
risks such as court injunctions.
Applications and Limitations
Forfaiting is typically used by corporates involved in international trade that are dealing with buyers in
either existing or new markets who need extended credit facilities. However, reputable banks are only
likely to be prepared to offer forfaiting facilities if the intended transactions pass stringent due diligence
checks. In particular, such banks will refuse to provide forfaiting where there is no genuine underlying
trade transaction.
Forfaiting transactions also need to be of sufficient size and longevity to cover the associated costs to the
provider. A typical minimum size for many banks is around USD500,000 or equivalent and with a credit
term of at least 90 days. The financing currency will usually also need to be one that is internationally
traded, such as USD, JPY or EUR.
Market Size and Trends
A lack of comprehensive published market data makes it difficult to estimate the total size of the
forfaiting market in Asia Pacific, but a reasonable estimate of annual activity is probably in excess of
USD30bn. At present the most active markets where exporters use forfaiting are China, Korea, Japan,
Taiwan, India and Indonesia.
However, because forfaiting helps exporters to safely explore new markets, while simultaneously
making the necessary extended credit period available to buyers, the range of markets showing an
interest in forfaiting is expanding.
Forfaiting is unique in that it provides more complete risk protection than any other trade finance
instrument. Most alternatives only offer partial credit protection and therefore the exporter is still left
with some residual credit risk on its balance sheet. By contrast, forfaiting offers the exporter a 100%
complete risk cover and funding solution, as well as removing all credit, country and commercial risks
from its balance sheet.
Conclusion
All the indications are that the use of forfaiting will continue to expand in Asia Pacific. As a
comprehensive risk and financing proposition, it leaves exporters secure in the knowledge that they can
focus on building their businesses.
A further indication of forfaiting’s potential is that its use is no longer confined to international trade. In
some markets, it is now also being used for domestic trade involving letters of credit denominated in a
local currency.
Taken as a whole, it is hard not to conclude that the prospects for forfaiting in Asia Pacific are bright – as
they will also be for sellers who use it.
Case Study
A cotton exporting company in India has been selling regularly to various Chinese textile-weaving and
fabric-making factories that ultimately supply to garment manufacturers for retail chains in member
countries of the Organisation for Economic Cooperation and Development. The sale terms have either
been letters of credit at sight or short-term open account credit of 30 days.
The Chinese buyers are under pressure from the garment manufacturers to extend longer credit terms
to meet the buying terms imposed on them by their customers, who are not prepared to offer supply
chain financing. This has eventually resulted in the Indian cotton supplier being requested to grant longer
credit terms, which is met with reluctance because of the additional risks and financing required.
Forfaiting is the obvious solution in this situation as it will allow the exporter to accept a 180-day usance
letter of credit (instead of sight or 30-day letter of credit) issued by the buyer’s bank. In addition, through
forfaiting, the exporter will receive payment up front after shipment at a pre-determined cost, without
incurring additional risks as the additional financing cost is passed on to the buyer by adjusting the
contract price.
All parties benefit in this situation. The Indian cotton trader is able to secure more orders from the
Chinese buyer because of the longer credit term granted, which allows it to meet the garment
manufacturer’s trade cycle.
Payments STP:
A Business Imperative
• A deeply credit-conscious commercial
environment makes it essential that
payments are made punctually to ensure
supply continuity.
• Manual paper processes increase the risk
of this not being achieved, with negative
commercial consequences – such as
suspensions of shipments by suppliers.
• Now is therefore an excellent time to focus
on achieving straight-through processing
(STP) for payments, which also fits well
with other market trends such as the use of
shared service centres.
• Achieving this payments STP is challenging
but definitely not impossible – especially if a
methodical approach is adopted and partner
banks give feedback on data quality to
minimise future errors.
Arthur Michael Tanseco, Vice President, and Sarfaraz Ahmad, Vice President, Regional Product Management, Global
M
uch has changed in the financial landscape since the economic crisis. The dramatic reduction in
the availability of external finance has seen corporate treasuries radically revising their working
capital strategies. The disappearance of inexpensive liquidity has led to a far tighter focus on reducing
the figures for, say, days sales outstanding. This in turn has led to rigorous enforcement of credit terms
by accounts receivable (AR) departments – for many, 30-day credit terms now really are exactly, not
approximately, 30 days.
Implications of Payments STP
This puts a considerable onus on accounts payable (AP) departments to achieve consistent straightthrough processing (STP) on supplier payments. If they do not, there are immediate commercial
consequences in the form of suspended shipments, as suppliers’ AR departments take an increasingly
firm line on late payments. These AR departments make no distinction between a payment that is
late because of an innocent error by the buyer’s AP department regarding a bank account number and
one that is late because the buyer lacks funds to settle. From their perspective, a late payment is a late
payment.
The knock-on effects of this should not be underestimated. Shipments that are suspended because of
late payment affect operational continuity – shop-floor production may be disrupted or even suspended,
significantly affecting profitability. In addition, this may have a subsequent effect on customer
relationships, such as an inability to meet agreed delivery dates.
The longer-term effect on supplier relationships, particularly if payment errors occur more than once, may
be severe. In the current credit-conscious times, one late payment may result in a delayed shipment,
but two or more may result in the suspension of credit altogether. The working capital consequences of
being forced onto pro forma terms speak for themselves.
On a more positive note, payments STP is also a major opportunity for the payer to improve efficiency
and reduce costs. Minimising manual intervention and paper processes to achieve this delivers both,
which in a more austere economic environment is essential.
What is STP?
Historically, STP was only relevant to processors of transactions, as this was one of the key performance
indicators that back-office units were measured on. In practical terms, STP actually denotes a transaction
that has been successfully processed, end to end, in a fully electronic fashion without any manual
intervention, measured across the entire processing chain.
Why is STP Critical for an Organisation?
The basic concept of STP revolves around delivering efficiency across the entire transaction processing
chain, which in turn results in the following key benefits:
increased throughput and reduction in transaction rejection rates;
reduction in costs associated with manual intervention and transaction rejections;
continuity in business operations due to timely delivery of essential goods and services;
improved buyer and supplier relationships and future business opportunities;
seamless transaction execution and reconciliation;
improved working capital management; and
optimisation of system resources and human capital.
In today’s economic environment, where many organisations are still struggling with working capital
pressures and others are trying to deal with permanent correction in the market, it is imperative for
them to improve efficiency in their operations and manage their costs. From a payments processing and
treasury operations perspective, ensuring STP is vital to achieving these objectives.
Appropriate Timing
At present, any corporate drive towards payments STP also fits well with other treasury trends.
Increasingly, corporates in Asia are beginning to appreciate the potential benefits of a centralised financial
processing model conducted in shared service centres. This typically goes hand in hand with investment
in enterprise resource planning (ERP) systems, which dovetails neatly with streamlining existing payment
processes to deliver payments STP.
This is particularly apposite where companies are trying to standardise on one ERP system. In the
aftermath of the spate of corporate acquisitions that took place in the run up to the financial crisis, this is
relatively commonplace. Many corporates now find themselves dealing with a mish-mash of vendor data
of extremely variable quality and inconsistent formats. This situation is almost a recipe for failed vendor
payments and so the need for a data and process clean up that will support payments STP becomes
paramount.
The direct cost savings inherent in payments STP have already been mentioned, but there are further
derivative cost savings that can be made in line with another current trend – improved cash-flow
forecasting. As the pressure to improve the use of liquidity has mounted, this has in turn driven a need to
sharpen forecasting accuracy – and payments STP is one of the factors that can assist with that.
Getting it Right the First Time
Payment rules include:
Validation requirements of the channels and systems involved in processing the transaction;
Formatting standards prescribed by industry bodies and boards, such as SWIFT, domestic payment
operators and regulators;
Regulatory guidelines in the respective jurisdictions of the originating and receiving parties – for
example, foreign exchange reporting, anti-money laundering or counter-terrorist financing; and
Requirements imposed by domestic inter-bank clearing systems or market infrastructures.
Once these are properly defined and documented, the likelihood of achieving straight-through processing
is significantly higher.
Validation Requirements of Channels and Systems
From the point of initiation to the time of final settlement, a single payment goes through a complex web
of channels and systems, each having to communicate seamlessly with one another through a common
language and unified logic.
The challenge here is to ensure that critical data is handed over from one system to another, while
retaining data integrity along the processing chain. As ever, “garbage in, garbage out” applies, with most
of the responsibility for avoiding this being on the preparer of the payment instruction, which obviously
has to be formatted correctly to ensure that all mandatory data required to process the payment is
provided at first point of contact. Any shortcomings here that cause the transaction to fall into repair will
incur additional costs and penalties.
The following information is usually mandatory for payments initiation:
debit and credit party location;
remitting and beneficiary bank details;
account details for both parties of the transaction;
transaction currency and amount; and
a valid value date.
The above is part of the first-level validation that will be built into the channels and systems. Usually, the
corporate will store more of the static details of the payment for future use, in the form of templates or
pre-formatted instructions, and thus only the transaction amount and value date change. At the point of
The business case for payments STP is compelling but achieving it requires resources and effort –
especially at the transaction initiation stage. This is by far the most critical in the entire processing chain
and warrants extreme care in its execution so that all payment rules – in terms of both formatting and
completeness of data – are strictly adhered to.
initiation, it will also be very important to determine any local language or special characters required to
support the transaction.
Once the instruction is passed on to the back-end processing system, other rules are applied to further
validate the instruction. Threshold amounts and/or cut-off times may come into play, as these rules are
built into the processing systems and market infrastructures.
Industry Rules and Standards
SWIFT is the primary standards organisation that prescribes payment rules across the global financial
community. Although these standards are primarily used for cross-border transactions, SWIFT has
started to expand these standards to domestic clearing systems as well.
This expansion clearly has a direct bearing on payments STP, since corporates and payment service
providers have to keep abreast of these developments in order to deliver it. There is more pressure for
banks and service providers to be quick on their feet, while corporates have the luxury of maintaining the
status quo on their existing file formats. However, this may come at a price, as the corporate may not be
able to benefit from new technology and may find it more difficult to link with payment service providers
and local clearing infrastructure that have already moved on to the latest version or the next level.
Regulatory Considerations
Regulatory changes are seen globally as a primary cause of STP failure. In fact, the cost of complying
with these regulations has become so high that even banks have already started to outsource work to
larger payments processors.
In recent years, the most common areas of regulatory focus have been:
foreign exchange controls;
anti-money laundering; and
counter-terrorist financing.
All of these regulatory considerations are extremely important in the context of payment rules as they
have to be accommodated in a real-time electronic payment environment. Banks have to ensure that the
information required by regulators in each country is provided, as steep penalties are imposed for noncompliance.
As banks become more stringent in their payment screening to comply with this, there is commensurate
pressure on their corporate customers to adhere to these guidelines. Therefore, it is critical for regulators
to keep abreast of regulatory changes and make necessary adjustments, as required.
Domestic Clearing Systems
The clearing systems used in Asia are as diverse as the countries themselves, each having a list of rules
that must be observed. Although a number of countries have already migrated to global standards, most
Asian countries are still running on domestic, proprietary messaging protocols. This is the case for the
larger markets such as India and China and for more advanced markets such as Japan and Korea.
While it may be convenient for a domestic customer to use in-country formats for their domestic
payments, the situation is less straightforward for a corporate with a multi-country presence. Such a
company will have to maintain multiple formatting rules within their payment system, which contributes
to higher costs and a higher probability of error.
All the above hurdles to payments STP may appear daunting, but a corporate’s choice of transaction
banking partner can have a major influence in reducing the scale of the challenge. A bank that can offer
payment repair facilities is one thing, a bank that can build on that to deliver an information feedback loop
that will avert the need for future repairs is quite another. Such a feedback loop may range from a phone
call to an artificial intelligence engine, but the end result is the same – the corporate client ends up with
more accurate data and is a step closer to payments STP.
FIGURE 1: Rules and Standards for Implementing STP
System Validation
1. Debit and credit party location
2. Remitting bank and beneficiary bank details
3. Account details, e.g. name and account number
4. Transaction currency and amount
5. Value date
6. Support of special characters
7. Bank holidays
Regulatory Guidelines
1. Foreign exchange controls
2. Anti-money laundering guidelines
3. Counter-terrorist financing measures
Industry Standards
1. File format structure
2. Local and regional industry standards, e.g.
IBAN
3. Message exchange protocols, e.g. SWIFT or
proprietary formats
Clearing Requirements
1. Domestic clearing requirements, e.g. bank
codes, routing numbers, sort codes
2. Processing cut-off times
3. Local market practices
Conclusion
Corporates should consider the four categories of payment rules as they define their own payment
processes and interface with the banks for achieving STP. These include, but are not limited to, those
mentioned in Figure 1.
At the same time, banks and payment service providers should continue to forge partnerships with
their customers to ensure smooth and complete integration of the processes associated with achieving
payments STP. With the help of specialist teams that are well equipped to support the deployment of
individual enhancements and industry-wide changes, it is also critical for banks and payment service
providers to inculcate the requisite flexibility and agility in their operations that enables them to adapt to
the ever-changing market and customers’ evolving needs.
Bank Assistance
Streamlined
Collections for Optimised
Working Capital
• Maximising working capital remains
as important as ever, especially in an
unpredictable economic environment.
• The efficient and timely collection of cash is
an important part of the accounts receivable
process.
• The use of new platforms, including
Internet and phone banking, can accelerate
the authorisation of direct debits. This, in
turn, will help ensure accurate remittance
information and smoother reconciliation.
Jemmy Ong, Senior Vice President, Global Transaction Services, Institutional Banking Group, DBS, Singapore
A
s the economy is recovering, there is still unpredictability in the environment where corporates
operate. It is still important for corporates to maximise their working capital and manage their cash
flow for the smooth running of their operations.
Managing collection efficiently is an increasingly important part of the accounts receivable (A/R) process.
It helps release cash tied up in the order-to-cash cycle, which contributes to the cash flow that is
important to sustain operations.
There are options available to corporates to further streamline collection processes to optimise their A/R
management. This article explores collection techniques available to corporates today.
What Makes a Good Collection Solution?
The key drivers for a good collection solution are as follows:
Speed
The time taken for accounts receivable to be converted to cash has a big impact on corporate cash
flows. Companies should look at solutions that can streamline the collection process to accelerate the
realisation of accounts receivable to cash.
Convenience
If corporates make it more convenient for their customers to pay them, they will get paid more promptly.
To achieve this, corporates should look at expanding collection channels to facilitate the payment
process.
Cost
This is one of the key factors in the decision making process for corporates. There are two key points
that corporates should take note of. Firstly, though cash and cheques are the most reliable and important
instruments used for collection today, the cost of handling cash and cheques are high for both parties.
Corporates should consider going electronic, as this will result in lower processing costs for the banks,
who will be more willing to pass back some of these savings to encourage corporates to adopt these
cost effective alternatives. Secondly, corporates should be realistic in assessing their internal costs,
particularly if they are considering outsourcing collection functions to the bank. Outsourcing is a zero
sum game, which means that the cost does not disappear. The bank will be able to offer a lower price by
leveraging the economies of scale of some of the existing operational processes within the bank.
Information
How Banks Can Help
Structure a Good Collection Solution
Offering a Better Alternative
Cheques have always been the most convenient way of settlement as the cheque clearing infrastructure
is mature and very efficient. However, processing such payments within a company is very manual
and can delay the crediting of proceeds into the account. Companies can provide their account number
and request that customers pay electronically, through an automated clearing house (ACH). The issue
with ACH payment is the limited remittance information that can be forwarded to the beneficiary due
to the 12 character remittance advice field that is inherent to giro payments. Beneficiaries, with limited
remittance information, cannot apply the funds if they have no idea which customer is paying them and
for which invoices. Payment solutions offered by banks nowadays include remittance advice that can be
sent to the beneficiary via email, fax or mail. There are normally charges associated, but email is usually
the most cost effective.
Collecting from customers by direct debit is definitely a good alternative. As the data comes directly from
the accounts receivable database, the company has full control and details of the collection, which helps
reconciliation. Banks can provide a remittance advice to the customer to inform them of the purpose of
the collection. Unfortunately, the use of direct debits to collect in the business-to-business (B2B) field is
limited, unless the buyer can convince the seller of the benefits or if it is an inter-company collection. For
the latter, DBS has set up a direct debit arrangement where a company in Singapore collects franchise
fees directly from its franchisees. The initiation of the collection is automated through a file upload
feature on an Internet platform, further streamlining the collection process.
Companies with large cash proceeds as a result of retail operations can consider alternatives to
depositing at bank branches. Banks like DBS offer a tamper-proof cash deposit bag service that enables
a corporate representative to drop bags at the counter without the need to queue. Each bag has an
indicator that alerts bank staff if the bag has been tampered with. The bag also has an acknowledgement
slip that is returned to the corporate representative immediately to confirm receipt. The cash is deposited
for same-day value. Companies can also make use of cash acceptance machines (CAMs), which also
reduce time spent queuing and allow deposits outside branch operating hours.
Information is necessary to facilitate reconciliation, which is a key aspect of the accounts receivable
management process. Without the necessary information, application of payments will be difficult, and
this will have implications for client relationships. Delay and errors in the application of payments can
affect credit limits allocated to clients. However, the challenge here is that it is difficult to ensure that the
customer includes all payment information. Banks can address this issue by having certain channels that
can help identify the customer that is paying the invoice and applying the funds to the right account.
As discussed, accounts receivable information is crucial to facilitate reconciliation and the application
of proceeds. But how can banks ensure that remittance details are consistently included in payments?
Some banks offer a virtual accounts service, allocating each payer their own virtual account number to
credit to. There is sufficient information embedded in the crediting account number to allow the bank’s
back-end system to pick up the reference number when the transaction hits the account. The bank’s
system generates reports to allow the customer to map the information back to their customer database.
The virtual account structure is not restricted to any particular payment type and allows the company to
always identify the source of a payment.
Automation
In the bank-to-consumer (B2C) space, banks with a good base of consumer accounts can offer various
solutions to automate collection from these accounts. The benefits to companies or billing organisations
are the various channels customers can use for direct debit authorisations (DDA) and faster turnaround
time for getting the DDA approved.
The more channels a bank can offer consumers to sign up to on GIRO, the greater the success. At
DBS, besides normal paper-based DDA applications, consumers with DBS accounts can apply for DDA
through eDDA (by swiping the card through the network for electronic transfers electronic fund transfers
at point-of-sale [NETS EFTPOS] terminal), iDDA (through the DBS Internet system) and xDDA (through
AXS self service terminals). The turnaround time to set up the DDA application if the consumer account
is with DBS is as follows:
Manual: 2 weeks;
eDDA: Instant;
iDDA: Next day; and
xDDA: Next day.
Once the DDA is approved, the information is usually sent back to the company/billing organisation as a
file that can be uploaded directly to their A/R database. The collection process can be further automated
by sending the GIRO file through the internet banking platform or via a host-to-host channel to the bank.
Another convenient channel for B2C collection is the bill payment service. The benefits to companies
are convenient channels for consumers and the ability to ensure that payers include full details. For most
banks, the bill payment channel allows consumers to pay through a personal Internet banking platform,
automated teller machines (ATMs) or by mobile phone. Reach can be further extended through AXS
self-service terminals. Payers have to set up the transaction on the bill payment system by selecting the
billing organisation and inputting the payment reference. This ensures that when it is time to pay the
company, the payment reference information will be included, facilitating the matching/ reconciliation
process.
Outsourcing
Lockbox has always been the preferred channel used by companies to outsource cheque collection
to banks. The retail lockbox solution has been successful mainly for B2C collection. The benefit to
companies is that cheques and remittance stubs are efficiently processed so that the cheques are sent
for clearing and the remittance information is captured. The company gets the information back as a file,
which can be uploaded to the accounts receivable system for reconciliation. The process is somewhat
similar for corporations under the wholesale lockbox. However, it becomes more complicated due to
the fact that companies tend to settle multiple invoices in one payment. More information capture is
required to facilitate the returning collection data and to help reconcile these items from their accounts
Streamlined Collections for Optimised
Streamlined
Working Capital
Collections for Optimised Working Capital
receivable. It also may not be realistic to expect corporations to mail the payment to a PO Box. Payments
are usually collected by an account manager or corporate representative directly. To cater to this, some
banks offer a hybrid solution, where instead of collecting the payments at the PO Box, the cheques are
collected at the company and sent to the bank by courier. Once they reach the bank, processing takes
place – irregular items, such as out-of-date cheques or cheques with no signature, are returned to the
company; post dated cheques are warehoused; key required information is captured on the system, and
cheques sent for clearing. This information will be returned to the company as a data file to upload to
their accounts receivable system.
The importance of accounts receivable management cannot be underestimated in these times of
economic uncertainty. Corporates must continue to review their internal processes to ensure they
accelerate collection and ensure that the accompanying remittance information is accurate to optimise
working capital. Banks with cash management expertise are in a unique position as they are able to
share industry best practices in collection techniques. Though the requirements of each company may
be different, companies benefit from shared experience and, together with ongoing investment in new
technologies and platforms, banks will help corporates achieve their working capital targets.
Conclusion
Case Studies
These case studies show how DBS provides collection services to its customers:
Top Tier Local Corporations
The collection solution for these companies has to address collecting from companies and consumers.
For B2C collection DBS uses all channels available, including retail lockbox services for cheques and
direct collection from consumers’ accounts through GIRO collection. For bill payment, consumers
with DBS Internet banking access can set up these companies as payees and use all DBS self-service
channels, such as Internet banking, ATM and mobile banking for payment. At the corporate level, the
bulk of payments are by cheque. DBS offers some of these companies detailed cheque deposit reports
to allow them to match incoming payments.
Child Care Centres/Schools
The bulk of collections are of monthly fees. Multiple channels are provided for parents/students to
automate collection of fees. The eDDA channel provides instant approval while the iDDA channel allows
them to set up payment over the Internet. The child care centre/school sends a GIRO collection file to
collect the fees from these accounts on a monthly basis.
On the B2B side, DBS uses GIRO collection to help the head office collect fees from its subsidiary child
care centres.
Taxi Companies
Taxi companies need to collect rental fees from their drivers on a daily basis. For the collection
turnaround to be one day, all drivers maintain an account with DBS. The DDA set-up is instantaneous via
eDDA. The taxi company sends a giro collection file to the bank each day. The rental fees are debited
from the drivers’ accounts and credited to the corporate account the following day. For taxi drivers, it is
convenient to use the extensive network of DBS cash acceptance machines outside bank branch hours.
Retail Chains
Most retail chain collections are by credit card, but they may still need to make daily cash deposits. The
solution is to provide them with convenient channels to deposit the cash without having to waste too
much time at bank branches. The cash bag solution allows them to drop off their cash at the counter
without queuing. Bank staff ensure that the bag has not been tampered with before returning an
acknowledgement slip.
Many food retail outlets need to deposit their cash after the close of business, when bank branches are
closed. These companies can use cash acceptance machines to deposit cash at their convenience. DBS
has also structured a cash consolidation sweep arrangement to consolidate the cash from individual
branch accounts. This allows management to track the collection of individual branches.
The Beneficial World of
Virtual Accounts
• Information is key in reconciling collection
transactions against outstanding accounts
receivable records.
• Lack of information results in delayed
reconciliation and inefficient working capital
management.
• A virtual account, as a collection tool,
has become an integral part of banks’
information management solutions.
• Collection channels, customised account
numbers and bundled service packages
make virtual accounts a viable proposition.
Ma-an David, Assistant Vice President, Product Management, Global Payments and Cash Management, Asia Pacific,
HSBC, Hong Kong and Wendel Kwan, Assistant Vice President, Product Management, Global Payments and Cash
Management, Asia Pacific, HSBC, Hong Kong
O
ne of the many consequences of the credit squeeze has been reduced availability of liquidity from
external sources. As a result, companies have sought to replace this by sourcing additional internal
liquidity. A relatively popular strategy is to centralise cash previously held in local business units through
some form of liquidity structure. However, another method for companies of all sizes is simply to
improve the accounts receivable (AR) process.
Accomplishing this is partly about improving processes – for example, ensuring that communications
with customers are timely, so that there are no outstanding queries and that payments are made
according to agreed terms. But such improvements are dependent on the quality of the data relating
to customer remittances. It is essential that the AR team have the most accurate and up-to-date
information possible.
Faced With Reality
Sadly, for many cash managers, the reality is different. Every day they will see thousands of payment
transactions credited to their collection bank account. For most of these transactions, information on
who paid what invoice is not available. This means the payment cannot be reconciled, which in turn
results in an inaccurate cash position and increased day sales outstanding (DSO).
In an effort to close their AR records, the managers will send reminders to all customers who have not
paid – reminders that are based on inaccurate records. They will then receive phone calls from customers
claiming they have already paid. This situation has several undesirable implications:
Increased DSO translates into an increased working capital requirement and funding costs.
The company’s reputation among customers suffers because they are wrongly chased for invoices
they have already paid.
If it is a quoted company, investors will be unimpressed if its DSO and other working capital figures
lag behind its competitors. If it is a private company, sources of external liquidity – banks, for example
– will be similarly unimpressed.
Therefore, improving the quality of customer remittance information is the foundation upon which wider
AR improvements can be built, which in turn delivers business benefits across the organisation in terms
of improved availability of liquidity.
A Treasury Manager’s Priorities
The payment instruments that customers use to send remittances have a significant effect on a
company’s ability to improve its AR data. Put simply, paper is a bad idea. Cheques are inherently
inefficient and processing them, even via an efficient lockbox operation, inevitably raises costs and
introduces delay. Therefore, the cash manager has a strong incentive to encourage customers to switch
from cheque payments to electronic methods such as wires or an automatic clearing house.
To some extent, the market in Asia is gradually moving in this direction anyway, though there are
obviously some specific local exceptions. But some companies are taking a more direct approach in
encouraging this behaviour. One method is to make electronic payment a business condition for new
customer accounts. In the case of existing accounts, some companies will offer a small initial discount or
other incentive for customers switching from paper to electronic payment methods.
Any reduction in the volume of paper remittances from customers eases the transition from manual
to electronic matching methods. Remittance information gathered electronically can be fed into an
automatic matching system, which reconciles remittances with the right outstanding invoices. This
is not only far less expensive than manual reconciliation but is also faster and more reliable, which
can be critical at the beginning or end of a month when remittances are at their highest levels. An AR
department under this sort of volume pressure and still using manual matching can easily develop a
backlog or make errors, resulting in customers being incorrectly placed on stop.
Maximising electronic remittances also helps to justify new investment in technology to support
treasury processes. Where such systems are already in place, more extensive and cost-effective use
can be made of them to automate reconciliation. This, in turn, pays dividends in terms of transparency
when it comes to control and audit, which are both areas where companies are keen to improve their
performance. To some extent, this is due to an internal desire to manage risk more tightly, but there
are also external pressures in the form of regulation such as Sarbanes-Oxley, which imposes stringent
requirements in respect of control and accountability.
The combination of these factors creates a compelling need for AR managers to focus on improving
AR reconciliation through better-quality remittance information. This also dovetails neatly with a broader
business trend, namely the migration of AR activity in Asia to a shared service centre (SSC). Historically,
only payments have been processed in Asian SSCs, as Asian collections were deemed too difficult and
diverse to centralise. As the payment infrastructure in Asia continues to evolve, this is beginning to change,
but the success of such change is, of course, heavily dependent on the quality of remittance data.
Information is the Key
So, what criteria determine whether remittance data is of sufficient quality to achieve straight-through
reconciliation? Completeness is an obvious requirement – if a payment covers multiple invoices, how
will all those invoices be identified in the data provided by the remitter? A long-standing issue here is the
truncation of such data. Many electronic clearing systems have limitations on the number of characters
permitted in the reference field of the payment message. As a result, only the first few of a batch of
invoice numbers might survive transmission through clearing. Similar limitations can also apply to the
electronic banking platforms that remitters may be using.
A further consideration is that any incoming data must be in a format that can be handled by the
recipient’s enterprise resource planning (ERP) or accounting application. Given the progress made on
standardisation in recent years, this is generally less of a problem than in the past, but on occasions
some intervention or assistance by the recipient’s bank may be necessary to deal with issues such as
interpretation of local language characters.
Even with extremely clean remittance information, the percentage of auto-matching achieved can
vary considerably. One factor that can reduce this percentage is the deduction of bank charges by
the remitting bank, or any correspondent banks along the payment chain. Some ERP and accounting
applications can allow for this by hard-coding bank fees associated with remittances from regular
remitters or by automatically assuming that any minor discrepancies are attributable to bank charges
levied in transit.
The New Frontier in Collections
The growth of electronic clearing systems in Asia represents a considerable opportunity to improve
AR management. As the convenience and cost savings inherent in electronic payments become more
widely appreciated, the number of customers remitting electronically will consequently increase.
However, as mentioned above, the reference data field provided in many electronic clearing systems is
often too short to accommodate a full list of all the invoices covered by a single payment. In addition, the
field may be needed for other purposes – such as the customer account number to which the payment
relates. As a result, while electronic clearing systems are an opportunity to improve AR management,
fully capitalising on that opportunity requires something more.
One such “something” is the virtual account, which is rapidly growing in popularity as a means of
streamlining automated AR reconciliation. Under a virtual account arrangement, the bank provides its
corporate client with a range of virtual account numbers. The client can then assign these numbers to its
individual customers. When customers make a payment through paper or electronic channels, they only
need to quote the virtual account number as the crediting account number. In reality, this virtual account
number does not physically exist. The bank’s virtual account engine will deduce the crediting account
number from this virtual account number, and the respective virtual account number will be captured on
the statement so that the customer can use it to immediately identify the remitter (see Figure 1).
If the remittance data is both complete and in a comprehensible format, then (assuming the ERP or
accounting system includes suitable functionality) the basic requirements for automated delivery and
reconciliation matching are in place. Depending on the bank’s technology, the remittance data may be
streamed in real time or the company’s application may instead poll the bank application for data on a
scheduled basis.
FIGURE 1: How a Virtual Account Works
Buyer ABC pays USD500
to company XYZ via
virtual account number
123400000001
Company XYZ’s bank will be
able to deduce the crediting
account number and payer
information from the virtual
account number
On company XYZ’s bank
account 123456789012
statement, it will show:
“Buyer ABC Cr USD500”
“1234” = bank a/c
123456789012
“00000001” = Buyer ABC
Business Benefits
Virtual accounts offer a number of important practical advantages:
Reduced administration costs: because virtual accounts can be used to automatically identify
remitters and are not dependent on the quality of remitter details provided in the payment reference
field, the costs of hiring personnel to manually reconcile receivables can be saved.
Reporting quality: virtual accounts speed up operations turnover and improve management reporting
because transactions are captured and displayed on statements in real time.
Stronger credit control: virtual accounts enable timely and accurate reconciliation of collection
information, thereby delivering a clearer individual and overall credit picture of customer accounts.
These advantages translate into material business benefits. Faster, more accurate reconciliations deliver
reduced DSO, working capital requirements and funding costs. They also minimise damage to the
business and its reputation caused when delayed reconciliations trigger the wrongful suspension of
shipments to customers that have actually paid. By the same token, they reduce credit risk through the
early and accurate identification of accounts that are delinquent. Finally, treasury control of both process
and available liquidity is also improved, which gives an opportunity to improve investment returns as well
as making regulatory compliance easier.
Bank Dependency
While virtual accounts have much to offer when it comes to enhancing AR performance, the exact
level of benefit achieved is heavily dependent on the provider bank’s capabilities. A case in point is
collection channels. As a virtual account is not a collection channel in itself, its effectiveness will depend
on whether a bank’s collection channels can recognise the virtual account number as the depositing
account number. These channels include the bank’s branch counters, automatic teller machine network,
cash and cheque deposit machines, Internet banking and high- and low-value collection systems. It
is therefore important to have an understanding of customers’ payment behaviour and, based on this
knowledge, equip the appropriate collection channels to accept virtual account transactions.
Another consideration is the method used by the bank to generate virtual account numbers. By default,
banks tend to use system-generated numbers for virtual accounts. However, corporate clients are ideally
looking for a more intuitive approach, such as customised account numbers that use reference numbers
that are already familiar to the company’s customers. For example, an insurance company might want to
use its policy numbers as virtual account numbers, as this information would already be available to its
customers. If the bank is able to offer this facility, this obviously streamlines the implementation – and
uptake – of using virtual accounts.
Future Developments
Partly in connection with the need to make virtual account numbers intuitive to the corporate client’s
customers, there is a growing demand for flexibility. For example, rather than just numeric virtual account
numbers, there is an increasing need for alphanumeric alternatives. Also, some companies are now
looking for dynamic virtual account numbers where only part of the number will be pre-registered and
the remainder can vary.
This last innovation is particularly important when it comes to identifying not just the remitter but also the
invoice numbers the remitter is paying. For example, the first few digits of the virtual account number
might be specific to the remitter but the last few might be used to indicate the invoice number being
paid.
Conclusion
Information is key to an efficient accounts receivable management process and the virtual account’s
ability to deliver 100% accurate identification of the remitter makes it a necessary reconciliation tool.
However, as it continues to evolve, the virtual account also has the potential to deliver accurate, quick
and cost-efficient end-to-end reconciliation down to the individual invoice level, with all the attendant
business benefits that that implies.
Although virtual accounts have considerable potential, for various reasons they may not be universally
applicable to all customers. Nevertheless, the company still needs a complete picture of all its collection
activity. Therefore, if the bank is able to plug virtual account transactions into its centralised reporting
engine, then the company’s clients will benefit from a consolidated picture of both virtual and non-virtual
account activity.
Case Study 1: Virtual Account Solution
for a Financial Services Provider
The Company
An Indonesian company is offering general and life insurance. Its products include life and non-life
products, unit-linked products and Sharia insurance. The company has about one million policy-holders,
which includes individual and corporate customers. Collections for insurance premiums are received
from agents and policy-holders through various payment methods – credit card, electronic transfers and
cheques. The policy number, which is coded in accordance with the insurance product type, is the key
reference used in reconciling payments.
The Challenge
The company’s main AR challenge lies in the reconciliation of payments from its policyholders because:
• Policy-holders often fail to provide full transaction information and the same policy-holder may use
multiple channels for remittances, making it extremely difficult for the company to reconcile the
transactions back to the accounting records.
• The company maintains just one collection account to which all policy-holders and agents remit. This
results in payments for different products being mixed up in a single account, which only exacerbates
the reconciliation problem.
Because of the above, a high level of costly manual processing is required to trace unidentified
payments.
The Solution
The company opted for a virtual account service. Figure 2 illustrates how this was arranged so that the
company could improve its identification of payments from policy-holders. Each remitter code represents
a policy-holder, while each remitter sub-code indicates the specific product the remitter is paying for, so
the company can immediately reconcile each remittance accurately.
FIGURE 2: Remitter Codes for Policy-holders and Sub-Codes for Products
Assign remitter code
Mr A (00001)
Mr B(00002)
805-00001X-001
805-00002X-001
805-00001X-002
805-00002X-002
Unit-linked investment (999) 805-00001X-999
805-00002X-999
Life products (001)
Assign remitter sub-codes Non-life products (002)
The Benefits
With a virtual account solution, the company benefited as follows:
Reduced personnel requirements: with close to 100% identification of payments, the work to follow
up and resolve unidentified transactions was significantly reduced.
Automated AR reconciliation: all virtual account transactions go directly through the company’s backoffice system, thereby streamlining report delivery and reconciliation.
Reduced DSO: Faster reconciliation of funds and AR records reduces the company’s DSO and
increases its working capital.
Case Study 2: Virtual Account Solution for a
Petrochemical Company
The Company
A Taiwan-based conglomerate has diverse interests in the fields of biotechnology, petrochemical
processing and the production of electronic components. Its customers are mainly manufacturers that
buy the company’s products to serve as raw production materials.
The Challenge
The company’s AR challenge is the reconciliation of customer payments. It has about 1,000 active
customers who settle their invoices using electronic payments, specifically telegraphic transfers. The key
concerns are:
• lack of information to identify remitters of incoming telegraphic transfers;
• manual downloading of reports;
• delays in reconciliation; and
• delays in key business actions (e.g. releasing goods).
The Objectives
The company’s objectives are:
• 100% remitter identification;
• automated AR reconciliation; and
• improved customer service by quicker release of goods.
The Solution
The structure of the virtual account is shown in Figure 3.
FIGURE 3: Company Defines its Own Remitter Reference Numbers
8
8
8
8
4-digit bank-assigned
cutomer code
1
2
3
4
5
6
7
9-digit customer-defined
remitter reference
8
9
1
Check-digit
The opportunity to define its own remitter references made it easier for the company to disseminate its
virtual account numbers.
The Benefits
With a virtual account solution, the company achieved the following:
• 100% remitter identification: virtual account numbers, a portion of which refer to the actual remitter
reference, are reflected in bank statements and collection reports, thereby ensuring remitter
identification.
• Lower personnel requirement: with improved data accuracy and automation of report delivery, the
number of full-time equivalent staff required to manually process reconciliations fell from two to 0.5.
• Quicker release of goods: improved reconciliation meant that the company was able to release goods
on the same day that payment was received, compared with the previous two-day lag.
Supply Chain
Management
Global Trade
Management:
A Key Import-Export
Strategy
• In a global economy, exporters and
importers are deploying a variety of value
chain strategies to meet the challenges of
extended supply chains.
• Trading with different countries requires new
capabilities, including managing compliance
and customs, trade finance, security and
transparency of total landed cost.
• Trade compliance is a must-manage item
for all exporters and importers. It has to be
fully executed during the global transport
process.
• An effective global trade management
practice needs to consider overall landed
cost so that executives can make the right
sourcing decisions.
Keith Ip, Director, Value Chain Management Solutions, Greater China, Oracle, Hong Kong
B
efore the global financial crisis, international trade had experienced a continuous boom for at least
a decade. Worldwide exports grew from USD5.7tr in 1999 to more than USD12tr in 2009. Trade
volume increased in all territories and regions around the world, particularly those associated with China
and Asia. This is directly reflected in the number of containers passing through terminals in Singapore,
Hong Kong, Kaohsiung in Taiwan or Shenzhen in China.
Whether the current focus of international trade is on ways to increase revenue or reduce costs, modern
companies have been taking initiatives to move beyond their home country borders, exporting products
to new markets and importing raw materials from low-cost countries. While such moves provide these
companies with new growth, they make the enterprises’ supply chains longer and more complex and
incur many potential uncertainties and risks. To meet these challenges and stay ahead of the competition,
companies have been regularly adjusting their value chain strategies to ensure more visibility, control and
efficiencies.
As an exporter or importer dealing with an increasing number of trading countries, parties and volumes,
any company involved in cross-border trades has to think about how to put in place an integrated
management framework, process and system as quickly as possible. For this reason, in recent years, the
topic of “global trade management” has moved towards the top of the agenda for business executives.
Global Trade Management
Global trade management is not just about managing trading transactions – it requires a company to
centrally manage all perspectives of international trade, including finance, compliance and customs,
security and landed cost, as shown in Figure 1.
Figure 1: Global Trade Management
Trade Finance Business Drivers:
■ Post-Entry reconciliation & Audit
■ Trade settlement
■ Optimise use of strategic
financial instruments (Letters of
Credit, Open Accounts)
Landed Cost
Landed Cost Management
Business Drivers:
■ Visibility to profitability
■ Optimise margins
■ Strategic sourcing decisions
Trade
Finance
Global Trade
Management
Security
Compliance & Customs Business Drivers:
■ Risk mitigation & penalty avoidance
■ Efficiency & process automation
■ Achieve best practice
Compliance
& Customs
Security Business Drivers:
■ Secure supply chain strategies
for customs preference
■ Maintain compliance with
security initiatives
■ Supply chain risk mitigation
This must be an integrated process as a trade cannot be transacted successfully if a company fails
to manage any one of these aspects. For instance, if products are held at customs because of noncompliance with local import rules, this might delay the whole delivery to important customers, resulting
in loss of sales, obsolescence and penalties. The cost of the trade unexpectedly increases and there
is customer dissatisfaction. This occurred when, after the terrorist attacks of September 2001, the US
imposed more rigid security procedures on all US imports. A simple mishandling of a container seal
number, for example, could prevent goods from entering the US. Initially caught out, exporters had to
tighten their processes accordingly.
The company’s trade management system must also be integrated with sales, procurement and finance
processes. For example, a letter of credit (LC) is a key financial instrument for international trade, which
is not required for domestic trade. Most companies manage them manually. A procurement team has
to communicate extensively with a logistics team during the purchase order fulfillment and delivery
process, while a finance team is required to be involved for interactions with LC-issuing banks. This
means inefficiencies and potential human errors. An integrated computerised approach for processes
and systems to manage the whole lifecycle of the LC would greatly improve matters.
It is important for global enterprises to have a complete and centralised perspective on worldwide trade
management. This will set a corporate standard for all regions involved in import-export businesses.
Trade Compliance
One important component in global trade management is trade compliance. In different countries,
government bodies and regulatory organisations have imposed a variety of regulations and rules for
Source: Oracle Corporation
import and export trades. If any of these are violated, goods will not be allowed to move across the
border. A licence might be needed beforehand or penalties and fines paid.
Trade compliance is an integral part of the transport process. Figure 2 shows how two perspectives are
interconnected in the export operation.
Figure 2: Global Trade Compliance
Global Export Process
Ship Goods
Party Creation
Sales Order
Creation
Party
Screening
Export Controls
Screening
License
Determination
Oracle GTM offers:
Product Classification
Compliance Screening
Export Documents
Export Declarations
Export
Declaration
Tender to
Carrier
Create Export
Documents
Pick/Pack
When just a few items are traded to a few countries, the challenges might not be so significant.
However, complexity increases dramatically when the number and variety of trading products and
territories rises.
There are two key areas that a company needs to pay attention to when setting up a framework and
system for global trade compliance. First, the company needs to establish a centralised platform so
that staff in each country have a complete and up-to-date set of rules for each trade route (for example,
Japan to US, Japan to Europe). Second, staff involved in various trade processes must be able to
check systematically against these rules during the transport cycle. If the trade compliance process is
separate from the transport process, then the compliance and logistics teams might not have the same
information, which can lead to costly consequences in delays and bad fulfillment rates. To achieve higher
on-time delivery rates in a global trade context, companies have to maintain visibility of all transport and
compliance checking milestones. It must be a holistic approach.
Total Landed Cost
To reduce costs, a large number of companies source supplies from overseas. However, it is difficult
to compare costs between different sourcing options as international trade involves higher transport
expenses, duties and brokerage charges. As Figure 3 illustrates, total landed cost can be 40% more than
the direct materials cost.
Figure 3: Landed Cost
Landed Cost Overview
China
manufacturing
Shipment
to Hong
Kong
Hong Kong
port
Vessel
carrier
US port
$5
Duties
$100
PO item price
$2
$3
$20
Kansas
City
Buyer
$5
Broker fees
$3
$2
$140
Total landed
cost
An additional 40% is added on to the purchase price
Duties, for example, can be complicated to calculate for sales of thousands of products to dozens of
countries. Each product item will have different “harmonised system codes” in different countries.1
Duties will be determined by how the goods are classified in these codes. More often, companies will
have local customs declaration teams or use external customs brokerage services in each country. Either
way, it involves a lot of manual work and depends on human familiarity with local rules for its execution.
It lacks control and adds risks.
There are also multiple types of duties that need to be paid, each requiring a different calculation formula.
Some, such as value-added tax in certain markets, can be very complex and it can be a challenge to make
sure the right amount of money is being paid each time when relying on people to perform the calculations.
Last but not least, most of the charges are based on order, shipment or customs-entry level and are not
directly broken down to the line item. To obtain accurate landed cost information, it is necessary to know
how to allocate each cost component down to line level. It is not possible for companies to do this by
human effort as the number of items is just too large in a big corporation. Instead, what is required is a
well-designed computer system in place to calculate total landed cost for each line item. The system can
provide a holistic cost structure on which a company can base its sourcing decisions.
Few companies truly understand the landed cost for each of their sourcing items without having a global
trade management solution in place. To have such valuable information provides a significant competitive
advantage when it comes to the pricing and marketing of products.
1
For more information about the Harmonized Commodity Description and Coding System, see the World Customs
Organization web site, www.wcoomd.org.
Conclusion
As the business world evolves, it is inevitable that more and more companies are going to operate
globally. Although trade conflicts and wars will continue to exist, the World Trade Organisation, as a
liaison body or as a mediator, tries to remove persistent roadblocks by working with different nations.
Almost all governments impose, from time to time, new regulations to protect their own country’s
interests. Importing and exporting companies need all of their staff to be fully informed about new
regulations and how they affect their business, and to fully comply with them. To achieve this, they
should look seriously at their overall global trade management methods, processes and information
systems, for then they will have a key competitive advantage – provided they put in enough effort and
pay enough attention to it.
Towards a
Solution: A Focused
Approach to Supply
Chain Finance
• Trade and supply chain finance has been
largely integrated into transaction banking
lines of business.
• Within that context, the nature and relative
contribution of trade finance is being refined
across the globe.
• A back-to-basics view arising from the
global financial crisis is necessary and timely
but ought not to preclude innovation and
evolution in trade and supply chain finance.
• The value around trade and supply chain
finance will be at the solution level and it will
require a holistic, solution-based approach,
with trade and supply chain finance leading
when appropriate.
Alexander Malaket, President, OPUS Advisory Services International
T
rade finance has emerged from the global financial crisis as an area of interest at all levels of
government, business, banking and international institutions. While a focus on trade finance has
long been common practice for a few global financial services organisations, it is atypical in most other
contexts and this new level of interest is seen either as a welcome shift or an unwanted spotlight,
depending on the organisation.
Whatever the case in individual organisations or, indeed, among individual executives in leading trade
finance businesses, this heightened focus must, at industry level, be seized as an opportunity to better
articulate, and to further develop, the value proposition that is represented in the provision of trade
finance.
The industry responded to pre-crisis risks of a reduction in intermediaries (resulting from a near-global
shift away from traditional instruments to open account trade) by focusing on supply chain finance
as a “next generation” model for trade finance within the context of integrated transaction banking
businesses. For some, this has been perceived and presented as a significant evolution, while others
have argued, convincingly, that supply chain finance is little more than a repackaging of a set of existing
and familiar transaction banking products, primarily for marketing purposes.
An Opportunity Exists
Whether trade financiers as a group genuinely intended to innovate and to provide net new value to their
clients, or whether supply chain finance was little more than a marketing tactic, is all but irrelevant at this
stage.
The value of trade finance has been undeniably demonstrated over the course of the global financial
crisis; the evaporation of pre-export finance, and the resulting 40% drop in trade flows from Asia to
Europe and the Americas as reported by various international institutions in mid-2009, together with the
effective disintegration of the shipping industry, with rates dropping by over 90%, were directly linked
to the large gap in trade finance. The global crisis focused attention on such figures, regularly updated
through the World Trade Organization, the World Bank, the International Monetary Fund and others –
even shining light on obscure, market-specific data such as the Baltic Dry Index1 as a proxy to reflect the
impact of the crisis through the flow of commodity goods and the related cost of shipping.
At the same time, clients and bankers were reminded that a key element of the value of traditional trade
finance – the proven capability to mitigate international risk – had been wrongly neglected in efforts to
respond to requirements around open account trade. This “lesson” continues to command attention,
alongside the ongoing demand for timely, fairly priced and dependable financing.
The combination of increased positive focus on trade finance, together with some lessons learnt by trade
financiers as an outcome of the global financial crisis, present an opportunity for trade finance to evolve
in the context of nascent programmes and solutions developed under the umbrella of global transaction
banking – and, more specifically, under supply chain finance.
Back to Basics in a New Reality
The greater focus on the value of trade finance – coupled with increased appreciation among bankers
about the relatively low risk profile of trade finance at a portfolio level – presents an opportunity for
innovation to trade finance executives with the required leadership skills. Neither, however, eliminates
the need for trade financiers to take a back-to-basics approach, at least to some degree.
Trade finance, from the simplest transactions to the most structurally complex, is fundamentally about
four things:
facilitating cross-border payment, securely and in a timely fashion;
providing financing options and solutions to one or more parties in a trade deal;
mitigating a variety of risks related to the conduct of business across borders; and
providing information related to the financial and physical flows linked to a transaction.
A renewed focus on these four fundamentals, with the intention of using them as complementary
building blocks in the development of next-generation trade finance, may be a useful and effective way
to maintain a link to proven elements of the trade finance business, while exploring ways in which trade
finance can evolve in the context of supply chain and transaction banking.
There is significant expertise and market value in trade finance as an element of financial services – value
that ought to be used for advantage and actively developed, as opposed to being allowed to fade from
view by inaction.
Certain leaders in the industry are deconstructing lines of business into solutions – eliminating product
ownership and product-based organisational silos, with varying degrees of support and success. Such
initiatives, meant to encourage a solution focus as opposed to a product focus, may well prove effective
and viable. Even under such models, however, it remains critical to ensure that the core value proposition
– and capabilities – of trade finance are preserved and expanded.
In this sense, trade finance, too, can benefit from a focus on the basics but only as a means of evolving –
not as a justification to revert to passive status quo.
1
A daily index of global shipping prices of various dry bulk cargoes, published by the Baltic Exchange.
So, Where’s the Opportunity?
The opportunity is in exploring and understanding the business in which trade financiers are truly
engaged. Is this a business about payments, paper and political risk?
On a certain level, it certainly is. On another level, it is a business that facilitates, through effective
instruments and processes, and through expertise, the movement of goods and services from one
corner of the globe to another. Just as leading brands across the globe work to communicate that they
are more than the sum of their products and services, so, too, the business of trade finance is about far
more than facilitating payments across borders or verifying documents against letters of credit.
The value and impact of trade – and therefore of trade finance – has been undeniably demonstrated to
link directly to international development, economic prosperity and standards and quality of life across
the globe. With such a view, leaders in trade finance can perhaps take the opportunity to apply ambitious
vision to the future of this vital business.
But, to be effective in business, vision must inevitably connect to action and to operational and market
realities.
When trade finance (as a product or organisation, or as a solution) is viewed in the context of increasingly
complex and increasingly global supply chains, the argument in favour of an expert hub represented
by a trade financier, becomes even more compelling, particularly when we note that 80% to 90% of
global trade flows are supported by some form of trade finance. In addition, lack of adequate financing
is identified almost universally by small and medium-sized businesses (SMEs), as being the single
greatest obstacle to growth and sustainable success. This appears to hold true across continents and in
commercial environments ranging from the most advanced to the most rudimentary.
The important role of SMEs as suppliers to the largest multinationals is gaining greater appreciation
and, accordingly, solutions that support SMEs will tend to enhance the efficiency and success of global
supply chains.
Moreover, the likelihood of pursuing opportunities in international markets is far higher today, and at an
earlier stage in the lifecycle of a business, than might have been the case even five years ago. Textbook
advice on expanding internationally suggests that businesses select a market that is similar to their home
market and proceed gradually, one market at a time. However, commercial and competitive realities
often demand a more aggressive and far-reaching approach to market development. In that new reality,
the role of a skilled adviser in international business is critical and will only become more important in the
coming years.
Can trade finance – as an area of expertise or an organisational entity – serve as a “hub” to respond to
the requirements of clients engaged in international commerce? All relationship bankers understand
credit and lending – relatively few understand these disciplines in the context of international markets.
In a product-agnostic environment, where the focus is entirely on client requirements and solutions, the
argument is perhaps amplified, in that expertise and advisory capabilities become even more important
than in a product-based environment.
Next-Generation Trade and Supply Chain Finance
As more businesses of all sizes and across all industry sectors engage internationally – Asia providing an
excellent illustration of the trends likely to shape global commerce – the importance of effective advisory
and solution support will only increase.
Chinese businesses, for example, are increasingly in search of resources and opportunities across the
globe, and it is widely acknowledged that the sheer scope and breadth of commercial activities will
require a range of solutions and support that cannot, today, be provided entirely by domestic financial
institutions. India, similarly, is in growth mode and is internationally focused after a period of domestically
powered recovery. Likewise, Indian businesses are in need of a portfolio of solutions related to
international commerce and would benefit from the services of an internationally oriented trade financier
acting as a hub in managing their relationships and accessing resources and solutions from across the
spectrum of transaction banking capabilities.
In complementary fashion, a trade finance and international business specialist knowledgeable in
the needs and challenges of supply chain finance would be an extremely valuable asset to the client
organisation, particularly in the early stages of international expansion or initial stages in a new market.
Looking at this approach from the top down, the notion is that a trade financier can serve in an advisory
capacity as a hub resource to corporates engaged in international business and can do so with an
eye to both the supply chain domain and the broader context of transaction banking, from which
complementary solutions can be drawn, to respond to the requirements of commercial clients of all
sizes.
Solution orientation is based on two primary considerations:
An intimate knowledge and understanding of a client’s business, including its competitive
environment; and
Expertise in the domain and subject matter related to international trade and trade finance.
Just as trade operations staff have been challenged to expand their outlook to better appreciate the
importance of client relationships and to take a more commercial view of operations activities, so
must trade financiers in the middle and front offices be challenged to better understand the broader
commercial context within which trade finance provides its value. The ability to do so will ensure
success in the increasingly important advisory role and will enable trade financiers to conceive and craft
better financing solutions across global supply chains, drawing upon resources in the broader financial
institution.
In the context of international trade and cross-border commerce, the opportunity in trade and supply
chain finance need not be in wholesale redesign of the business but may be discovered in turning the
conventional model on its head, while remaining focused on the fundamental “pillars” of trade finance
(payments, financing, risk mitigation and information). A modular approach to assembling solutions
related to trade and trade finance – based on expertise and an advisory focus – will serve commercial
clients well in all markets, and will cement a relationship while allowing for evolution in the organisational
models adopted by financial institutions over time, from silo- and product-based to product agnostic and
client-solution-centric.
Conclusion
The foregoing is not intended to position or advocate an internal battle for territory among executives
leading various businesses in transaction banking or, indeed, in international banking.
Trade finance clearly has an opportunity to benefit from its positive profile, to better articulate its value
to commercial clients, the financial institution within which it operates as a business and to other
stakeholders (including governments and regulatory authorities) interested in international commerce.
This opportunity must be fully exploited, to ensure a robust, dynamic and evolving trade finance
capability across the globe – and such a process must begin with the largest players in the business
of trade finance – financial institutions on the supply side and supply chain anchors (large retail and
manufacturing clients) on the demand side.
Once the model is inverted to drive from expertise and an understanding of client needs, the modules
or components of eventual solutions can be drawn from a variety of sources (internal and external to a
financial institution), and tailored to meet the specific circumstances around a client or transaction.
Linking the Physical and
Financial Supply Chains:
Internal and External
Challenges
• Post financial crisis, as businesses start
to focus on growing sales rather than just
survival, attention has returned to the
opportunity for improvement in returns
offered by better supply chain management.
• However, the biggest challenge is linking the
two parallel supply chains: the physical and
financial.
• Internal silos and gaps of information
between logistics operations and finance
departments can be a major barrier to
success.
• There is potential for banks to bridge the
gap, as they have visibility of different
transactions, but they need to step up their
understanding of the physical supply chain.
Carl Wegner, Head, Transaction Banking, Standard Chartered Bank, Taiwan
I
n the wake of the global financial crisis, the challenge for many businesses is no longer just survival
but how to thrive. This in turn will lead to renewed interest in winning market share and beating
competitors by being efficient – and increasing supply chain efficiency will be the key. Success is not just
about well designed products; it is also about having the right products available at the right time in the
right place, and of course at a price point that is competitive.
Advances in the Physical Supply Chain
Over the years, the concentration of management resources on improving the physical supply chain,
which is responsible for the delivery of traded goods, has yielded rapid development and streamlined
processes. However, the challenge has increased in complexity as more and more goods are sourced
overseas, especially from low-cost, less sophisticated locations. As a result, returns have varied
depending on the levels of collaboration and cooperation between the different companies and service
providers in the chain.
Today, it is not unusual for large multinational corporations (MNCs) to have a chief supply chain officer
(CSCO) reporting directly to the chief executive officer (CEO) or president. The focus of this position
is to build efficiencies into the existing business process. As part of this, the team focusing on supply
chain management has to translate the traditional supply chain metrics into business impact and financial
improvement metrics. This is an effort that the senior management can understand and therefore
continue to support in the hope of seeing an improvement in the bottom line.
In most cases, creating efficiency relates to streamlining the physical supply chain – the planning,
ordering, and delivery, receipt and use of goods. Some of the benefits can include shorter time to
market, reduced production or delivery costs and reduced inventory levels, which also reduce costs.
Although there has been tremendous progress in this area, there is always room for improvement
as the sourcing and geographic expansion of business adds different layers of complexity with each
additional business partner involved in the transaction. As noted before, sourcing internationally instead
of domestically brings added complications: customs, overseas delivery and, of course, import/export
procedures. But companies that make this a priority compete not only in terms of the quality of their
products. The efficiency of their supply chain also becomes a differentiating factor.
What makes this challenge a little easier is that there are organisations in this area that have helped to
set standards for excellence, which means that there are tangible goals and specific targets that can be
benchmarked against industry standards. Some organisations are global in scope, such as the Council of
Supply Chain Management Professionals (CSCMP), which encourages education on both sides of the
transaction for better communication. Based on input from organisations like this, the CSCO can set his
or her team’s goals and continue to track progress of goods in the physical supply chain. However, this
also often means that the CSCO’s attention is focused solely on the physical supply chain rather than the
equally important financial supply chain.
The Financial Supply Chain and Silos
The financial supply chain involves managing bank credit lines, fees for bank services and the timing of
payments and receivables to optimise the benefits and lower the financial costs to the company. For
large companies with large banking groups, already managing this is a challenge, especially recently with
the increased focus on the stability of financial institutions.
As everyone is working hard in their respective silos, there has been limited opportunity for collaboration
between the financial and physical supply chains. Dr Thomas Speh at Miami University, US, and a former
chairman of the CSCMP has noted that “linking the financial supply chain to the physical supply chain
could build tremendous benefits for efficiency, but is rarely done as the managers of each area do not
speak each other’s language.” Another issue, according to Dr Speh, is that besides not speaking the
same language, financial and supply chain executives rarely collaborate – they tend to work within their
own silos, each with a focus on disparate outcomes that are uncoordinated.
This can happen if the CSCO has come from the logistics side of the business rather than from the
financial side or if the CFO or the accounting professionals do not fully understand the logistics side of
the business. While the CFO may have an understanding from a risk perspective of the suppliers, they
need to liaise with the purchasing department to use this knowledge to manage payment terms, and
the financial department needs to explain the trade-offs that different payment terms would make. An
example would be the ability to change payment terms based on production and shipment metrics on an
automated basis, via a scorecard updated in real time. Some companies may be able to do this already;
however, often only those with the scale to set up their own proprietary systems do, which means that
most companies are not capable of this level of sophistication.
This also means a change in sourcing parameters: a supplier might be chosen not only for the quality
of its products but also for the quality of information it can provide on its production processes. This
information may be almost as valuable as the products. The depth of collaboration and trust that would
allow this information to be shared between traditional adversaries – buyers and sellers, means that
disclosure often only happens when there is a long history between the trading partners. In addition, that
However, when a company looks at the costs of the goods as they move through the whole supply chain
and the cost of working capital, then the idea of a “financial inventory” to complement the physical
one that most CSCOs focus on may be helpful. If CFOs can bring that mindset of connection with the
physical supply chain side, then the combined benefits to the company may bring it ahead of its peers,
as it is a very small group of companies that are operating at this level.
information has to be combined with data from other providers for a fuller picture, raising the questions
of whether responsibility for this lies with the physical or the financial supply chain and who is going to
track it – the CFO or the CSCO?
Some MNCs have addressed this issue by changing their organisational structure. This has included
appointing a finance executive to the supply chain team, which might include representatives from
logistics, manufacturing, sourcing and marketing. The finance executive can play a critical role by helping
to provide a financial focus to supply chain decisions. The finance executive helps explain the financial
ramifications of physical supply chain decisions – anything from constructing a new warehouse to adding
manufacturing capacity or attempting to reduce the days of receivables outstanding.
In this way, supply chain decision makers not only see decisions from the financial perspective, they also
become educated on how best to modify them to improve financial performance. Several world-class
firms have taken this step to reorganise their supply chain organisations, through inclusion of the financial
perspective in supply chain decisions, and they have been rewarded with supply chains that are not only
responsive but also making positive impacts across a wide range of financial parameters: cash-to-cash
cycle reductions, reductions in working capital, improved return on investment (ROI) on supply chain
assets and many other financial dimensions.
Looking on the positive side, this gap also means there are great opportunities for collaboration and cost
savings throughout the complete network of business partners, including raw materials procurement,
manufacturing, logistics providers and, now, financial institutions.
Systems Challenges
For the coordination of this information inside a company, an enterprise resource planning (ERP)
system is the obvious tool to connect the different data needed by various business functions into
one consolidated database. However, being able to leverage the data is a much greater challenge.
Often due to historical business processes, there may be information silos that keep the logistics and
financial divisions from communicating with each other. For example, traditionally the CFO or accounting
department just want to know when they are going to have to pay for raw materials or finished goods.
They do not need to know the processes it took to reach that payment point; but, if they did, they might
see additional leverage points to reduce the overall financial costs to the transactions.
In addition, larger companies have ERP systems, while smaller suppliers may not. To make this
information process work smoothly there has to be electronic links, as paper ones will not provide
information in a timely enough fashion to take advantage of opportunities. Furthermore, both sides
usually have separate banks for trade services. These factors make it harder to link the different
parties together to manage a complete purchasing, production, shipment and payment transaction
from beginning to end. The best way to coordinate all this information is electronically, but workflow
management and security are both concerns. ERP systems may provide a solution, but only if the buyer
and seller use the same ERP, which is a big limitation. If a trading company sells to multiple buyers, it
would clearly be impracticable for it to purchase, install and maintain multiple ERP systems.
Another possibility is a single bank system, and some banks have been offering systems that provide
financial collaboration benefits to their customers. However, banks have to be willing to work with each
buyer and seller from the credit perspective, and have the geographic and legal capability to work with
all of the sellers. Some banks do have this capability; however, the vendors would still be required to
change their banking relationships and carry out integration with the same bank as their buyer. In cases
where there is a heavy sales concentration on one buyer (the goal of many buyers is to focus purchasing
on a smaller universe of sellers), this solution is feasible and can be rolled out as a requirement for new
procurement decisions.
Financial Institutions as the Mediators?
Conclusion
As electronic information gathering and management gets easier, there is less and less reason not to link
these two supply chains for the value they can produce. The banks that learn to leverage this first will
be the winners by learning the most about transactions to reduce risk and by helping customers reduce
costs. They may also have the advantage of banking with all the companies in the ecosystem to build
scale and understanding of that particular business and to really know their customers.
Information is the key and there is a unique opportunity for banks to play a role in bringing customers
to the next level, as they have access to the details of various related, but separate transactions. For
example, every trade transaction, whether open account or under a letter of credit (LC), also has a
payment linked to it. If the bank is financing that transaction, then it is likely to be looking at both buyer
and seller in order to review their credit. The bank will do its due diligence and review transactions via
UCP 600 if it is using an LC and through its own internal credit guidelines for an open account transaction.
So the bank may have the right information to better understand the timing of the payment. From a cash
management standpoint, the reporting and tracking, certainty and transparency of the timing of that
payment is of value to many different members of the chain. As banks continue to develop their factoring
and supply chain business models to accommodate the increasing amount of open account transactions,
the value of the information acquired through linking the financial supply chain to the physical one will be
a potential risk mediator that can help them do more business in the whole ecosystem. However, they
will also have to develop methods of managing some of the physical supply chain touch points to bring it
all together.
Tax-Effective Supply Chain
Management in China
• It is the third year since the introduction of
corporate income tax (CIT) reform in China
and most corporates realise that they will
face a higher tax burden.
• A tax-effective supply chain management
(TESCM) structure can mitigate the tax cost
arising from the reform of CIT, export of VAT
leakage and other unfavourable factors.
• Good planning includes realignment of
different functions under different parts of
the overall supply chain, along with profit
drivers and risk factors.
• While business restructuring can result
in tax savings, the changes should be for
reasonable commercial purposes and
adhere to the arm’s length principle as
required under the CIT law.
Becky Lai, Partner, International Tax Services Leader – Greater China, based in Ernst & Young, Hong Kong; Andrew
Choy, International Tax Services Partner, Ernst & Young, Beijing, China; and Travis Qiu, Partner, Transfer Pricing and
Tax Effective Supply Chain Management, Ernst & Young, Shanghai, China
I
n the last two years, China has undergone major changes to its tax regime – including the unification
of corporate income tax laws in 2008 and reforms to value-added tax (VAT) and business tax in 2009
– and a current study to converge VAT and business tax is expected to be implemented in 2013. These
developments have changed the tax landscape in China. Investors are evaluating the implications of the
current system and the impending changes in order to structure their Chinese operations to manage the
overall tax costs of doing business in China. Many corporates are constantly redesigning their supply
chain models in response to the rapidly evolving Chinese tax environment – a process that is known as
tax-effective supply chain management (TESCM).
Considered below are the challenges that foreign corporates now face in China from a tax perspective
and the key factors involved in a successful TESCM project.
Impact of Corporate Income Tax Reform
During the past three decades, the Chinese government has been attracting foreign direct investment
(FDI) as a priority to drive the country’s economic development. The government has introduced
significant preferential tax policies to encourage foreign corporates to invest in China. Under the 2008
reform of corporate income tax (CIT), two sets of policies that had separately applied to foreign and
domestic corporates were unified. Also, tax incentives shifted from being purely based on production
to energy preservation, high-tech or projects encouraged from time to time by the State Council. The
incentives are applied equally to foreign-invested or domestic enterprises. On tax connected with
turnover, the actual VAT burden hinges on the current policy of encouraging or discouraging exports – for
example, there could be VAT export costs on certain products not encouraged for export by the state,
such as wood.
Most of the preferential tax policies previously available to foreign investment enterprises (FIEs) in the
production and export-oriented sectors have been taken away, although there are grandfather provisions
to reduce the immediate impact. But when these FIEs gradually emerge from the transitional period (to
end by 2013), in general, they will be subject to much higher tax costs under the new CIT regime. Figure
1 highlights some common changes following the CIT reform.
Pre-2008
Post-2008
Statutory CIT rate
33%
25%
Common preferential CIT
policies
15%, 24%, etc.
Tax holiday – production FIEs
2-year exemption and 3-year
50% reduction
No
Reduced CIT rate – exportoriented FIEs
Continue 50% reduction
No
Dividend withholding tax – FIEs
Exempted
10% (normal rate) or 5%
(reduced by tax treaty)
Though the statutory CIT rate used to be 33%, when generally available preferential treatment policies
were taken into account, it was common to see the effective rate for many FIEs (especially in the
production and export-oriented sectors) at only 12% to 15%. So, because of the exemption of dividend
withholding tax, foreign investors needed to pay only 12% to 15% tax on the operating profits of their
Chinese subsidiaries in order to repatriate cash out of China in the form of dividends.
Possible Planning Opportunity (1)
With the CIT reform, the overall effective tax rate on dividend repatriation can be as high as 32.5% – i.e.
CIT plus dividend withholding tax – which is more than double the previous effective income tax rate.
It would, therefore, be worthwhile for foreign corporates to revisit their Chinese operations and see
whether there is an opportunity to reorganise their business functions – for example, manufacturing in
China, with the principal trading function elsewhere, and research and development in another location.
This realignment of functionality and risk concerning Chinese entities in order to justify a corresponding
profitability in China is at the heart of TESCM. Tax benefits arise when there is a transformation of the
operating model so that profit drivers such as value added functions and risk are assigned to a low-tax
jurisdiction – for example, Hong Kong (see Figure 2).
FIGURE 1: Some Effects of the Reform of CIT
FIGURE 2: Value-Added Functions and Risk Assigned to a Low-Tax Jurisdiction
Identify profit drivers
#
Centralise management profit drivers
Current structure
#
Future structure
Risk
based profit
Value-added
profit
Risk
based profit
Risk
based profit
Risk
based profit
Risk
based profit
Profit from core
operations
Value-added
profit
Profit from core
operations
Value-added
profit
Value-added
profit
Value-added
profit
Profit from core
operations
Risk
based profit
Profit from core
operations
Profit from core
operations
Profit from core
operations
Profit from core
operations
Profit from core
operations
Value-added
profit
Profit from core
operations
China
Hong Kong
China
Manufacturer
Hong Kong
Principal
Distributor
26%
Statutory tax rate
18.6%
Statutory tax rate
36%
Statutory tax rate
26%
Statutory tax rate
18.6%
Statutory tax rate
36%
Statutory tax rate
# For illustration purposes only
The overall CIT costs of operating in China for foreign investors were lower before the reform. When the
profit drivers were kept in China, together with corresponding profitability, the CIT costs were not high
after including all the preferential treatments then available to FIEs. That said, multinational corporates
were not motivated to limit the extent of the functions undertaken in China and very often their Chinese
manufacturing bases were structured as “fully fledged manufacturers”, which bore most of the risks and
carried out major functions in the overall supply chain.
To achieve tax savings by justifying a lower profitability in Chinese manufacturing operations, such
entities may limit their corresponding risks and functions through conversion into “toll manufacturers”
or “contract manufacturers”, which are generally compensated with pre-determined profit levels on
a cost-plus basis. Under these arrangements, Chinese manufacturers, which are located in a high-tax
jurisdiction, only undertake functions directly pertaining to the production cycle, such as production
scheduling, manufacturing, quality control and local sourcing. Key functions and profit drivers such as
marketing, distribution, research and development, and their corresponding risks within the supply chain,
are migrated to the “principal company” located in a low-tax jurisdiction (see Figure 3).
FIGURE 3: Migrating Key Functions and Profit Drivers to a Low-Tax Jurisdiction
Shared services
Ownership of
materials
Product
development
services
Administration
services
Management
services
Suppliers
R&D
Hong Kong Hub Co
Sale of
finished goods
Processing and
warehousing
services
Deliver
materials
Manufacturing
Functions
• Business strategy and
planning
• Marketing strategy and
brand management
• Strategic sourcing
• Supply chain management
Risks
• Market and credit risk
• Inventory
Returns
• Residual profit
• Intangibles
Functions
• Production scheduling
• Quaility control
• Recruitment and training
• Local sourcing
Risks
• Capital investment
• Operating efficiency
Returns
• Cost plus
Sales companies
Product sales
Deliver goods
Services
Customers
Functions
• Local market analysis
• Channel management
• Local sales
Risks
• Cost control
• Sales effectiveness
Returns
• % of sales
Legal title
Physical flow
Services
By having different functions in different areas of the supply chain, the principal company assumes most
of the profit drivers and risk factors. It is responsible for strategic management and business decisions
in relation to sales, distribution and research and development. Together with proper transfer pricing,
the principal company is able to retain residual profits. And being in a relatively low-tax jurisdiction, the
migration of functions and related profits will ensure considerable tax savings.
Conversion Considerations
In the above example, the Chinese manufacturing companies that are converted from fully fledged
manufacturers into single-function or limited-risk toll or contract manufacturers would have different levels
of functionality and risk factors, as well as their own asset profiles. This would result in a drop in profitability
and such changes would potentially attract challenges from the Chinese tax authorities. The more important
question is whether or not such a conversion would trigger tax exposure known as “exit tax upon business
conversion”. In this regard, it is important to observe the related implications under the Chinese General
Anti-Avoidance Rule (GAAR) and general transfer pricing principles in the existing CIT regime.
Headquarters
Under the existing regime, there is no specific provision that requires the imposition of tax on business
conversion or restructuring. Nonetheless, the CIT law and its detailed implementation rule provide the
GAAR provisions that are used by the Chinese tax authorities to undertake special tax adjustments on
transactions entered into for tax avoidance purposes. For business transactions undertaken between
companies and their affiliates that are not in compliance with the “arm’s length principle”, the Chinese
tax authorities have the right to adjust these transactions based on reasonable methods. The arm’s
length principle requires unrelated parties to conduct business transactions with each other at a fair
market consideration and as per business norms. Relevant tax regulations also provide the basis for the
authorities to assess tax if there is any valuable intangible – e.g. customer lists or distribution channels –
being transferred from one party to another.
In light of the above, it is important to note that while business restructuring under TESCM would result
in tax savings, any changes should be for reasonable commercial purposes and must adhere to the arm’s
length principle. Potential exit charge implications should also be analysed and monitored carefully in the
planning process.
Effects of the Reform of Business Tax
There are three major types of turnover tax in China:
value-added tax – mainly levied on sales of tangible goods;
business tax – mainly levied on service income or transfer of intangible properties; and
consumption tax – mainly levied on a selected list of luxury or polluting products.
The Chinese government revamped and reissued provisional regulations on VAT, business tax (BT) and
consumption tax (CT), which took effect in 2009. One of these changes has had a profound impact on
foreign corporates doing business with China.
Under the previous regime, for income derived from the provision of taxable services, BT was imposed
on income to the extent that the related services were rendered in China. In principle, foreign corporates
were not subject to BT if they performed the relevant services outside China. However, under the
current provisional regulations, BT is imposed on income derived from the provision of services where
either the service provider or service recipient is in China. Such a change in the definition of “taxable
services” has significantly expanded the taxable scope on income from the provision of services for BT
purposes (see Figure 4).
FIGURE 4: Changes to the Business Tax Regime
Locations of services rendered
Previous BT regime
Current BT regime
In China by non-Chinese service providers
Taxable
Taxable
Outside China by non-Chinese service
providers to Chinese service recipients
Non-taxable
Taxable
The above change may not have an actual impact on Chinese service providers. However, in the case of
cross-border service arrangements entered into between non-Chinese service providers and Chinese
service recipients where the related services are rendered outside China, the transactions (or the nonChinese service providers) would be subject to an additional tax of 5% on the gross service income
derived from China.
In the example shown in Figure 5, under the previous BT regime, the sales and marketing support
company would not have been subject to BT on its service fee derived from the manufacturer provided
that all the necessary services were not rendered in China. However, under the current BT regime,
the related service fee would be subject to 5% BT notwithstanding the location where services were
rendered. Note that unlike VAT, BT is neither creditable or refundable and there is no reverse charge
mechanism that may enable the passing on of BT costs.
FIGURE 5: Example of Change in Business Tax
Purchase order – settlement
Chinese manufacturer
Raw materials
Functions
planning
• Marketing strategy and
brand management
• Qualilty control
• Local sourcing
Risks
• Market risk
• Inventory
Returns
• Residual profit
• Intangibles
PRC
Provision of
marketing and
promotion services
Customers
Finished
goods
Non-PRC
Customers
solicitation
and liaison
Service fee
Functions
• Customer relationship
• Marketing and promotions
Risks
• N/A
Returns
• Cost plus
Sales and marketing
support
Legal title
Physical flow
Services
Possible Planning Opportunity (2)
To mitigate the additional BT cost, it is necessary to transform the operating model. Given the proximity
of the sales and marketing support company to customers, the conversion of this company into a
distributor would effectively eliminate the 5% BT costs imposed on the service fee (see Figure 6).
Instead of earning a service fee – taxable for BT purposes – from the Chinese manufacturer, the related
entity would earn income from the trading of finished goods with customers. Operationally, such a
transformation would have a minimal impact from the customers’ perspective as they would continue to
receive the finished goods delivered directly from China and they would continue to deal with the same
personnel – now under the distributor – on a day-to-day basis.
Suppliers
FIGURE 6: A Transformation of the Operating Model
PRC
Suppliers
Chinese manufacturer
Raw materials
Non-PRC
Delivery of
finished goods
Customers
Sales of
finished goods
Sales of
finished goods
Functions
• Qualilty control
• Local sourcing
Risks
• Inventory
Returns
• Residual profit/Split profit
• Intangibles
Functions
• Customer relationship
• Marketing and promotions
planning
• Marketing strategy
• Brand management
• Supply chain management
Risks
• Market risk
• Credit risk
Returns
• Split profit
Purchase
order –
settlement
Distributor
Legal title
Physical flow
Services
In addition to the 5% BT saving, if the distributor is located in a low-tax jurisdiction relative to that of the
manufacturer, the change of business model may achieve even more tax savings by migrating additional
functions and profit drivers to the distributor, as explained earlier. Note, however, that apart from tax,
there are other considerations – for example, customs, foreign exchange controls and preference of
customers – that would need to be considered to formulate an operationally feasible and tax-optimal
supply chain structure.
Conclusion
TESCM can deliver greater benefits than tax or supply chain initiatives in isolation. Tax planning
incorporated into reform of the business model allows greater flexibility to tailor new business operations
in order to maximise tax benefits. China provides a variety of advantages that are not tax-related: cheap
labour costs, a mature and broad-scope manufacturing base, more than a billion consumers and highquality services. These characteristics make China one of the more favoured countries for setting up
manufacturing-based FIEs. With a thorough consideration of the particularities of Chinese practice, an
effective TESCM structure can mitigate to some extent the tax costs arising from the country’s reform
of CIT, the export of VAT leakage and other unfavourable factors.
Green Supply Chain
Management:
Considerations for CFOs
• The Global Supply Chain Council and GXS
conducted a study of 150 executives on the
topic of green supply chain management
(SCM) in late 2009.
• Almost half of surveyed companies plan to
implement green supply chain management
practices within procurement and sourcing;
warehousing and distribution; production
and manufacturing functions.
• Most financial executives view green
measures as a cost burden necessary to
comply with government regulations and to
reduce risk of potential litigation.
• Beyond compliance, green SCM
programmes provide numerous financial
benefits, including cost reductions, revenue
growth opportunities and long-term
competitive advantage.
Steve Keifer, Vice President of Industry and Product Marketing, GXS, Washington DC
T
he Environment – both scientists and politicians describe it as the greatest challenge of our
generation. How can we financially incentivise industry to take a more sustainable approach towards
maintaining the health of the planet? The costs present a seemingly insurmountable financial burden to
corporations. But where some see cost, others see unparalleled revenue potential. A growing number
of entrepreneurs and venture capitalists describe green business as the greatest economic opportunity
of our lifetime. Which view is correct? The answer is both. CFOs must understand both the costs and
challenges of sustainability in order to minimise costs and maximise opportunity from green initiatives.
Perhaps no country can have a greater impact on the environment than China. With the second largest
economy and the largest population in the world, China’s influence over global affairs is growing by
the minute. China is well aware of its potential to rebalance the impact of industry on the environment.
Consequently, the Chinese government has been aggressively promoting the concept of sustainability
for over a decade with various subsidies, incentives and research grants. But how have these
government policies influenced the opinions of private-sector business leaders throughout China? To
better understand the attitudes and priorities of Chinese business leaders, the Global Supply Chain
Council and GXS conducted a study of 150 executives on the topic of green Supply Chain Management
(SCM).1
The results of the study were encouraging. Almost half (47%) of all the companies surveyed plan
to implement green SCM practices in the next two years. Complexity and cost considerations,
unsurprisingly, were cited as the main barriers to further investments in sustainable business practices.
Many financial executives would probably agree. Green business practices are often viewed as a cost
that must be absorbed to avoid negative publicity in the media, to comply with government regulations
and to reduce the risk of potential litigation.
1
Global Supply Chain Council - Green Supply Chain Management in China Study
http://www.supplychains.com/en/sur/?15
FIGURE 1: Incentives for Implementing Green Practices
Brand building to promote as green company
Compliance with corporate sustainability
Increase supply chain efficiency
Competitive advantage for doing business
Complying with customer requirements
Save cost through implementing efficiencies
Motivating suppliers to perform better
There is no motivation
Other
0%
10%
20%
30%
40%
50%
60%
Source: Green Supply Chain in China Study by Global Supply Chain Council, 2010
However, the executives surveyed also perceived many benefits to be gained from a green approach.
Over 50% of Chinese corporates expected cost savings to be achieved through increased supply chain
efficiency and reduced waste. Perhaps more interesting is that a high percentage of respondents view
strategic incentives to a green approach, such as enhancing the company’s brand (53%) and creating a
competitive advantage (43%). These results suggest that there is more to sustainability than compliance
and risk mitigation. What are the true financial benefits of green SCM practices? And why should CFOs,
treasurers and other financial executives be supportive of sustainability initiatives?
Cost Reductions from the Green Supply Chain
Over half of the Chinese survey respondents stated that green SCM practices promote efficiency and
reduce waste, which implies cost reductions. How do green measures reduce cost in the supply chain?
Sourcing and Procurement
Popular green procurement initiatives included using electronic sourcing processes (43%) and reduced
use of paper in contracts (29%). Such techniques not only lower a company’s carbon footprint, but also
reduce manual processing costs through automation. Another popular green sourcing strategy was
transferring the cost burden for sustainability to suppliers through formalised guidelines (39%) or audits
(30%). Perhaps the largest cost saving opportunities can be generated from green product design and
lifecycle management (42%).
Consumer electronics offer an excellent case study into the potential of green product design. Due to
their short product lifecycles, products such as TVs, personal computers and mobile phones are being
replaced and upgraded at rates much faster than other products, generating large amounts of waste
in the process. Consequently, electronics have been a target of legislation on recycling and materials
composition. Japan enacted a Law for Recycling of Specific Kinds of Home Appliances (LRHA) in 2003,
which mandates that consumers recycle with the assistance of retailers and manufacturers. The EU
took a more aggressive stance with its Waste Electrical and Electronic Equipment (WEEE) Act, which
effectively transferred the burdens of environmental responsibility and recycling from the consumer
to the manufacturer. The strategy behind “producer responsibility” is to provide financial incentives
for investing in environmentally-friendly designs. However, the financial incentives are not limited to
cost avoidance. Designing products for recycling and reusability creates long-term cost reduction
opportunities as well. The greater the percentage of content from retired products that can easily be
recovered and reused, the less need there is to purchase raw materials for future production.
Warehousing and Distribution
The most popular green initiatives for warehousing included reduced inventory (61%), order consolidation
(51%) and optimising the location of distribution hubs (29%). All of these green distribution initiatives
reduce the carbon footprint of the supply chain and reduce costs. In fact, many of these programmes
merit implementation independent of their environmental benefits. However, one green initiative cited by
survey participants which is often overlooked as an opportunity for cost savings is the recycling (48%) or
reduction (47%) of packaging materials.
Transport
The most popular green transport initiative was route optimisation (44%) to reduce “empty miles.” Other
popular initiatives included reducing expedited shipments (44%) via air freight, reducing truck idle time
(36%) and migration towards more aerodynamic trucks (9%). Perhaps the two most promising areas are
alternative transport modes (27%) and new engine technologies (11%).
An increasingly popular alternative to land-based trucking is short sea shipping, which refers to transport
of goods on the sea but between end points on the same continent. Over 40% of all freight moved in
Europe occurs via short sea shipping. Similar coastal approaches are popular in Australia, Japan, Korea
and increasingly China. Sea shipping provides numerous benefits, including alleviation of congested
motorways and decreased air pollution. In many cases, short sea shipping also provides lower costs and
faster transport of goods.
A variety of new engine technologies (advanced internal combustion, hybrid-electric, fully electric) and
alternative fuels (compressed natural gas, biofuels and hydrogen) are emerging in the market, each
with differing levels of increased efficiency and reduced emissions. The cost advantages of these
new technologies vary depending upon factors such as the price of fuel and level of government tax
incentives. Consequently, many CFOs have postponed investments in electrification due to concerns
about how quickly the new technologies will be adopted and which ones will become the leader.
However, major international freight and logistics operators such as UPS, FedEx and DHL have not
waited. Each has announced programmes to use alternative fuels and new engine technology which
Packaging has a significant impact on the environment. In some countries product packaging represents
up to 30% of household waste. There has been significant focus in recent decades on consumer
recycling programmes to increase re-use. There have also been additional efforts to minimise the case
and pallet level packaging used in warehousing and transport functions. Reducing packaging lowers
costs in several ways. First, there are fewer materials which need to be purchased. Second, smaller
dimensions and lower package weight enable more efficient warehousing and transport of the goods.
For example, a smaller packaging footprint may enable higher density and increased load rates during
transport.
studies confirm save up to 30 miles per gallon2. Corporates concerned about using their own capital to
purchase electric vehicles can outsource to third-party logistics providers to gain the advantages of lower
costs and lower carbon footprint while incurring significantly less risk.
Revenue Growth from the Green Supply Chain
The previous sections explained the many supply chain efficiencies and cost structure advantages to be
gained through green SCM initiatives. However, many of the survey respondents also view green SCM
as creating opportunities to strengthen brand equity and increase competitive advantage.
Figure 2: Three Financial Benefits of Green Supply Chain Management
Cost Reductions
Revenue Growth
Competitive Advantage
Reduced waste
Lower energy consumption
Lower regulatory risk
Carbon credit market
New product offerings
Premium pricing
Strength of brand
Availability of capital
Growth of market share
New Products
One of the biggest opportunities that exists is to launch new products which appeal to buyers seeking to
reduce their carbon footprint. The consumer products industry has been one of the most successful with
green products. Consumer packaged goods and food companies have introduced a variety of popular
product lines such as compact fluorescent light bulbs, high efficiency detergents and organic fruits,
vegetables and dairy products. An entire “clean tech” industry has emerged in the manufacturing sector
to build energy generation, storage and infrastructure technologies to support renewable wind, solar
and hydroelectric power sources. Telecommunications companies offer advanced video-conferencing,
virtual events and telepresence suites to reduce the need for travel. Financial services companies have
introduced electronic banking, electronic payments and credit cards with green rewards.
Market Share and Customer Relationships
Increasingly, large buying organisations are factoring green considerations into purchasing decisions.
An AT Kearney and the Institute for Supply Management survey in January 2007 found that 60% of
2
UPS 2009 Sustainability Report – A 12 month study of hybrid diesel electric delivery vehicles by the US Department of
Energy’s National Renewable Energy Laboratory found improved on-road fuel economy of 28.9%.
corporates had deselected suppliers for failing to meet sustainability criteria3. Large multi-national
corporations, particularly in the US and Europe, are focused on building strong brands based upon
corporate social responsibility. Government ministries concerned about public opinion have also adopted
sustainability mandates. Suppliers to these large organisations that lack green products or sustainability
programmes risk loss of market share and customer revenues.
The Carbon Credit Market
New carbon trading markets, which are emerging around the world, offer an opportunity for corporations
to monetise the benefits achieved through sustainability programmes. Regulations limit a corporate’s
right to emit pollutants to a specified quantity. If an individual company is not able to make the necessary
reductions, they must purchase credits from another company via a carbon exchange. Conversely, if
a corporate exceeds its target emission reductions it can trade credits with others for a financial gain.
Buyers of credits are paying a financial penalty for not adhering to specified emission targets. Sellers
receive monetary rewards for exceeding the government’s specified environmental goals. The largest
carbon markets today are designed to facilitate the buying and selling of offsets for the EU’s Emissions
Trading Scheme (ETS), but new “cap and trade” programmes are being implemented in Australia,
New Zealand and other countries around the world. Carbon credits are becoming an increasing liquid
instrument as new market participants such as hedge funds have begun to actively trade them in an
effort to diversify their portfolios. The world’s largest marketplace, the European Climate Exchange,
experienced an 82% year-on-year growth in volume in 2009, surpassing 5bn tonnes of CO2: equivalent
to EUR68bn of trading.
A focus on sustainability is increasingly a factor in the availability of commercial loans. Consider the
Equator Principles, which have been adopted by over 50 of the world’s largest banks, such as ANZ,
HSBC, Mizhuho, Standard Chartered and Bank of Tokyo Mitsubishi UFJ. The Equator Principles apply
to complex capital projects, such as the construction of power and chemical processing plants, mines
and transport, environmental and telecommunications infrastructure. Prior to loan approval, projects are
assessed for social and environmental impacts. Projects which pose a high or medium risk may require
loan covenants to ensure compliance with the sustainability principles.
A growing percentage of investors take the view that companies which embrace corporate sustainability
are best positioned for long-term shareholder value. Investors believe that these companies are best
positioned to capture the market potential for products and services based upon sustainability principles.
Furthermore, investors anticipate less downside as these companies are proactively managing risks
associated with environmental or social developments. Several stock market indices have been created
to rank socially responsible corporations, such as the Dow Jones Sustainability Index and FTSE4Good.
The indices are utilised by certain asset managers who are increasingly focused on sustainability as a
factor in portfolio strategies. For example, large pension funds that manage retirement assets for public
sector employees are tending to avoid investments in companies with potential environmental issues or
human rights violations. The trend is noteworthy, as these socially responsible investors have some of
the largest amounts of capital to invest.
3
AT Kearney and the Institute for Supply Management - True and Profitable Sustainability Management
http://www.ism.ws/files/SR/SustainabilityReport.pdf
Availability of Capital
CFOs seeking to raise capital in the global markets or commercial lending segments may find that
the demand for their new debt or equity offerings is increasingly dependent upon their sustainability
position.
To download a copy of the
Global Supply Chain Council study,
visit www.supplychains.com.
To learn more about
Green Supply Chain Management,
visit www.greensupplychain.com.
The Power of Technology
The Power
of Technology
The Changing World of
Payment Channels
• Electronic payments continue to evolve,
improving convenience, visibility and risk
management.
• A number of channel innovations are
changing the payments landscape. Their
adoption in the corporate environment will
further improve visibility and efficiencies.
• Speed, security and standards are the core
factors driving innovation.
• Corporations can take advantage of this
change through a structured move towards
electronic channels.
Anand Mukati, Senior Vice President, Client Integration & eDelivery, Asia Pacific, HSBC, Hong Kong
I
n the last 10 years, there has been a visible trend towards electronic payments in most countries in the
Asia-Pacific region. The increasing use and development of electronic payments helps to improve the
efficiency of the entire financial system by improving liquidity and cash visibility throughout the supply
chain as well as reducing the cost of processing cash payments via traditional channels.
Traditionally, for commercial transactions between one business and another (B2B) and between
businesses and consumers (B2C), payment portals and direct connection channels have been used
extensively. Now, the speed with which mobile technologies are being adopted shows no sign of
relenting. According to the International Telecommunications Union, in 2007 there were three times
more mobile telephone subscribers than fixed-line users1. In developing countries, even people without
bank accounts often own mobile phones and have incorporated them into their way of life.
With strong mobile phone penetration rates and large rural populations, Asia-Pacific’s emerging markets
offer abundant opportunities – especially for transactions access to the “unbanked”. The recent
introduction of authorising payment transactions, account enquiry and bill payment services on smart
phones by banks in Asia Pacific is a recognition of the “app-based” innovation in the market today. This
is making it easier for businesses to make their payments. Payment access through Apple’s iPad, Dell’s
Streak and other tablet computers cannot be far away.
Innovation in Electronic Channels
The introduction of breakthrough electronic channels in the last few years has also spurred innovation.
For example, to bring banking services to villages, telecommunications entrepreneur Anurag Gupta
distilled a bank branch down to a smart phone and a fingerprint scanner. A bank representative goes
directly to a village and sets up shop. Savers line up and give an identification number, have their
fingerprints scanned and then deposit or withdraw small amounts of rupees. The transactions are
recorded through the phone and the representative later visits a bank branch to pick up or drop off
rupees as needed. Indian banks are already using this system to open millions of new accounts – 22
banks across 21 states, including the State Bank of India, have already opened 3.7 million accounts,
with a target of 80 million by 2011. The system is called Zero, after what Mr Gupta says is India’s most
important innovation – the number zero – which many believe was invented by Indian mathematician
Aryabhata in the sixth century. The Zero system is already helping Indian construction workers in Bahrain
open bank accounts and send money home.
1
http://www.itu.int/ITU-D/ict/statistics/ict/index.html
The key aspects of innovation are increased speed of execution of payment transactions and improved
convenience to customers who did not previously have any means to make such payments. Speed
in making payments, from acquisition through to the settlement of funds to the beneficiary account,
is determined by multiple factors. Payment acquisition has outgrown the bricks-and-mortar banking
environment and moved to other channels, reaching out to customers at their convenience. Customers
can now originate payment instructions, which flow immediately into a bank’s back-office system.
Where before, access was restricted to a desktop computer in the office, this has changed to smart
phone applications from banks that allow for the authorisation of payments and balance and account
enquiries. The access and convenience that these channels provide have been critical factors in changing
the way customers organise their payments.
Thinking Ahead
Looking to the future, the very nature of innovation will need to be rethought. Most people equate
innovation with technological breakthroughs, embodied in revolutionary new products that are taken
up by the elites and eventually trickle down to the masses. But many of the future electronic channel
innovations will consist of incremental, but significant, improvements to products and services that
enhance speed and access.
There are three areas where channel innovation is likely to take place: through customers who might
look to other providers to help build their connectivity options; through sellers of enterprise resource
planning (ERP) systems who are using their industry and process knowledge across numerous projects
to build best practice into their systems; and through ERP sellers who are including integration tools
within their systems that seamlessly link with the SWIFT network. As customers demand more robust
and standardised electronic communication between their financial management systems and their
banks, ERP sellers are streamlining banking communications into a single, efficient channel that makes
payments and deposits to the customer accounts simple and direct.
In India, Tata Consultancy Services is looking at using mobile phones to connect televisions to the
Internet. Personal computers are still relatively rare in India, but televisions are ubiquitous. The company
has designed a box that connects the television to the Internet via a mobile phone. It has also devised a
remote control that allows people who have never used keyboards to surf the Web. The new product,
called Dialog, has immense potential for retail businesses and small and medium-sized enterprises to
reduce their use of cash and improve the collections cycle by introducing a completely new electronic
channel to communicate with banks. Consumers can connect their mobile phones to televisions in retail
outlets and directly transfer funds without the need for cash.
Another existing but underused electronic channel is SMS (short messaging service) for sending texts
via telecom operators. Research firm Gartner says global sales of standard mobile phones stood at close
to 315 million units in the first quarter of 2010. This compares with just over 54 million smart phones sold
in the same period. If SMS payments and collections were used, vendors could invoice their customers
electronically and follow up with an SMS message asking for payment. Confirmation of the message
could trigger a transfer of funds from the bank, which, once the funds are received, sends remittance
information back for reconciliation.
Another potential area of innovation is the use of existing technology in imaginative ways. The use of
mobile phones and tablet computers to provide anytime, anywhere access to customers’ financial
systems is already well under way.
Security and Standards
Customers, technology sellers and banks will, however, need to keep two key things in mind when
considering channel innovations: security and standards. Security is closely linked to a customer’s use of
an electronic channel. Trust and confidence in payment channels is of particular importance in ensuring
mainstream usage.
Because a payment system is an external interface to a customer’s internal core applications, there
are more security challenges. The use of industry-strength security protocols with electronic channels
builds trust and confidence. Banks that can offer secure solutions that are easily deployed with
minimum integration will become market leaders. For regulators, maintaining confidence in the payment
system is of paramount importance. Regulators across the Asia-Pacific region want to ensure that an
adequate security infrastructure is built into the national payments systems. Systems that suffer from
compromises in security could lead to financial management problems in key institutions in the payment
system, which in turn could spread instability throughout the wider financial system.
On average, companies integrate as many as 10 proprietary electronic banking systems to transfer
information between their financial applications and their banks. These systems may use widely different
protocols and data formats, which often results in an overwhelming amount of complexity and system
maintenance that drives up the cost of electronic banking for companies. Introducing a standards-based
access point for managing customers’ electronic communications with multiple banks is therefore
critical.
Reacting to Innovation
The centrality of cash within a business raises the importance of innovative changes in systems – and
their increasing use within the business community. Payments innovation can be traced back to 1999
when the first breed of payment providers, such as PayPal, Netella and WorldPay, were launched. The
impetus behind these payment platforms was the rise in B2C transactions, coupled with new and
consumer-centric methods of meeting the need for fast and convenient online payments. Momentum
has increased in recent years due to further innovation and the launch of platforms such as Google
Checkout and Bill Me Later. With these, a steady increase of B2C technologies within the B2B space can
now be seen.
Customers need to re-engineer business processes to reduce operational costs. Streamlining payments,
either though centralisation or a payments factory, ensures the optimised use of resources. Integrating
corporations with banks through “closed user group” channels or other secure alternatives will enable
banks to automate procedures from origination to processing and for inward payments from reception to
settlement and finality of payment.
FIGURE 1: Customer Transition Roadmap
Identify
payables/
receivables
Checks paid/
received
Improve process in-house.
efficiency.
Checks paid/
received from
Improve cash
vendors and
visibility.
customers.
Identify
strategic
objectives
Reduce costs.
Identify
process
improvements
Map processes.
Customers
and vendors
education
Terms and
conditions
definition.
Planning and
testing pilot
Pilot countries.
Testing plan.
Perform valueadd (VA) / non- Communication User
entitlements.
value add (NVA) for migration.
analysis.
Fraud
Collection of
management.
bank and other
Checks paid for Redesign the
information.
process.
User and
tax.
production
testing.
Business as
usual (BAU)
Roll-out to all
countries.
PostImplementation
review.
Confirmation
of achieving
strategic
objectives.
Benefits of Innovative Channels
Reduced Costs
With the use of improved electronic channels, customers can expect to reduce costs. Reductions in staff
and the use of paper are two of the most prominent areas of cost reduction. Printing and stationery costs
can also be significantly reduced, while at the same time the overall administrative burden of managing
large quantities of paperwork is less.
Simpler Payments
Moving to electronic channels can simplify the payment process by streamlining operations. Efficiency
gains are also achieved through the easy identification of billing errors and other inconsistencies within
the payment process.
Treasury managers have a better visibility of their cash across countries where they operate. This helps
them with cash pooling and reduces their overdraft burden, further reducing costs. Having real-time
access to cash positions, treasury managers are also better placed to make cash forecasts.
Fewer Errors
Having an efficient payment process and improved visibility of the overall cash position in a business has
the added advantage of reducing the number of errors in the process. Approvers of transactions are in a
better position to validate them and reduce the occurrence of fraud within the entire process.
Improved Cash Visibility
Other Advantages
The move from paper to electronic procedures will go a long way to building a sustainable and
environmentally responsible company. According to Pay It Green, a non-profit alliance, paper cheques
require more than 500 million gallons of fuel and 342,325 tonnes of paper over the course of a year in
the US alone.
Having a structured process in the move to electronic channels will help customers have a clear
understanding of the strategic objectives and how these will be achieved during the migration process.
In addition, customers will be in a position to help with the transition to an efficient automated process
by participating in a value analysis. It is pointless merely to automate what was already an inefficient
process.
The transition process also ensures that customers give adequate thought to risk management and
controls in the payments process. Preventing fraud by managing user entitlements and access controls
will ensure that customers are compliant with regulatory bodies as well as mitigating any fraudulent
action by erring employees.
Conclusion
The world of electronic channels is changing rapidly. Specialisation and innovative use of existing
technologies is driving customer behaviour towards process efficiency, reduced costs and better visibility
of cash positions across regions. However, adapting this innovation to suit corporate customers will be
a key determining factor in its adoption. Security, standards and regulatory changes will also make a key
difference in the adoption of newer and enhanced channels.
Customers will need to align their strategic objectives with each channel they use and ensure that
these are met as implementation progresses. The huge potential demonstrated in the B2C marketplace
provides the B2B world with a blueprint for progress, a world driven by growth in global e-commerce.
Mobile Banking for the
Corporate Treasury
• Corporate customers already use mobile
phones for many internal functions and
banks can leverage this to provide corporate
mobile banking services.
• In terms of treasury, mobile devices
are a very good fit for providing costeffective and differentiated services around
authentication, work flow, information
delivery and risk management.
• Banks, however, need to overcome
corporates’ concerns regarding security,
control and functionality, if corporate mobile
banking is to grow.
• Banks can learn from technology companies
to develop ways of handling security and
scalability issues to ensure adoption of
the mobile channel for their corporate
customers.
Krishna K Ayyalasomayajula, Associate Engagement Manager, Banking and Capital Markets Practice, Infosys
Technologies Ltd; Yogesh P Mishra, Senior Principal, Infosys Consulting; and Shaji Farooq, Vice President and Head
of Banking and Capital Markets Practice, Infosys Technologies Ltd, US
C
orporate mobile devices are multi-channel, highly secure, always available and broadly deployed.
By leveraging these devices, the next generation of mobile-based services can serve corporate
banking customers, and specifically treasury officers. To do so, such systems will need to move beyond
payment-based services and provide broad-based capabilities. This article examines the mobile treasury
and cash management services banks can offer, and what measures banks can take to ensure the
success of their services.
Mobile Devices as a Banking Channel
Financial institutions worldwide are beginning to make aggressive forays into the mobile space.
Mobile devices provide the customer with easy access to important information and services, while
simultaneously shifting traffic away from more expensive banking channels (that is, the call centre
and branch). Furthermore, a number of functionalities make mobile an attractive channel in a financial
services environment:
The continuous availability of mobile devices makes them perfect for receiving payment alerts and
authorising payments whilst on the move (especially important in a disaster recovery scenario).
Mobile devices can provide users with a second-factor security measure to support a traditional
online password.
Location-awareness features offer supported services like ATM (automated teller machine) and
branch locators, as well as location-aware deals and discounts.
Remote deposit capture functionality provides the ability to electronically capture and deposit a
cheque using the mobile device. This saves time and offers convenience for both the customer and
the bank.
Customers can use their mobile device to view and approve bills. Invoice presentment and approval
is particularly useful for regularly used services.
Currently, development in corporate mobile banking has been limited to payment-based services or
mobile versions of web portals. Examples of these include the SMS (Short Message Service) alerts sent
by HSBC’s Business Internet Banking system for deposits/withdrawals, and Wells Fargo’s CEO Mobile,
which is a mobile-optimised version of the company’s CEO (Commercial Electronic Office®) portal.
The Case for Mobile Corporate and Treasury Services
The adoption of mobile banking by corporate clients is still at a nascent stage. An erroneous perception
about weak security, concerns about a lack of IT control over data and features, absence of welldeveloped functionality, and an inability to display large amounts of information on a small screen have
stifled innovation in this space. However, this is now changing. With the growing use of mobile devices
as a business tool, many corporate customers are warming up to the “on the go” convenience of mobile
banking. According to a survey1 by research firm TNS, 40% of the executives surveyed are willing to
consider mobile banking, while only 4% are currently using a mobile banking solution. Also, corporate
customers are looking at a wide variety of features to be available on their mobiles (see Figure 1). This
gap between willingness to use mobile services and low adoption presents an opportunity for banks to
innovate and provide mobile banking services that differentiate them from their competition.
FIGURE 1: Features of Mobile Banking Most Helpful for Business
Viewing recent transactions
Transferring funds
Receiving alerts on account activity
Stopping payment on cheques
Getting statements/checking of account history
Making payments
General information such as weather updates, news
Loyalty-related offers
Managing Investment
Real-time stock quotes
Don’t currently use,
but would consider
Don’t currently use and
will not consider
None of these
Source: TNS
In contrast to consumer mobile devices, corporate mobile devices have some inherent advantages that
make them an appropriate channel for the deployment of financial services:
Mobile devices are widely available to corporate customers and already widely deployed by the
target users of treasury services.
In the corporate world, there tends to be high adoption of single platform mobile services within a
company, which make it easier to use standard applications.
Corporate smartphones are by nature multi-channel devices supporting corporate e-mails,
messenger services, short messaging services and voice. This multi-channel system can be
leveraged to provide multi-factor authentication, which in turn provides a more secure communication
link than other consumer devices (e.g. a laptop computer).
1
“Forty Percent of Middle-Market Banking Executives Would Consider Adopting Mobile Banking Solutions for their
Business”, survey by TNS http://www.tns-us.com/news/new_survey_finds_forty_percent.php
Many corporations already deploy internal applications on their smartphones for tasks such as
approvals and expense management, which has helped create familiarity with conducting business
activities using corporate mobile devices.
Banks can therefore leverage the power of ubiquitous, highly secure, multi-channel corporate mobile
devices to build new or augmented corporate banking services. Moreover, treasury services have some
key features which are a very good fit for enablement through mobile channels:
Treasury products are generally used by senior managers of an enterprise who are already equipped
with corporate mobile devices.
These individuals have in the past been targeted for other sophisticated business-to-business
channels, such as the Internet, and are comfortable dealing with the bank through such remote
channels. (Bank of America, for example, provides its CashPro Online service for corporate
customers.)
The banks’ IT functions have already been working with the IT departments of their commercial
customers to jointly provide web-based and client-server solutions for treasury services.
The value and impact of these treasury products is very high. Consequently, easy availability of realtime information around these services is expected to have a high-client impact.
Some of the services for treasury products such as cash management services and lockbox status
management have approvals and alerts as key needs, which can be easily met by a smartphone.
From a feature and availability perspective, mobile devices are capable of providing treasury services.
However, the perceived challenges surrounding the level of security and inadequate corporate IT control
need to be suitably addressed if mobile treasury services are to develop. Often this perception of a lack
of security is not directed at the mobile devices themselves but at services not controlled by corporate
technology and security groups. For this reason, some companies are building enterprise-specific mobile
applications while restricting third-party applications. We believe an opportunity exists for banks to work
with their corporate customers to leverage their customers’ internal enterprise networks in order to
provide multiple mobile-based services.
Smartphone adoption continues to increase, as do the needs of treasury services customers. Moving
forward, it is very likely that mobile banking services will become an important consideration for
corporations selecting their financial services providers. Consequently, banks need to leverage the
mobile banking channel to provide a multitude of treasury services. Below are some of the treasury
functionalities banks should offer to their corporate clients:
Augmented authentication: The mobile can be used as a channel to augment authentication on other
channels such as the Internet and voice. For example, the mobile can be used for password resets
of the web portal. SMS (Short Message Service) tokens can be sent via mobile to verify transactions
processed on other channels. The multi-channel features of smartphones can be used to send e-mail
alerts with a link to secure web pages.
Enhanced work flow: Mobile devices can be used to provide approvals and other actionable services
as part of certain processes. For example, services such as transaction approvals can be easily
enabled through mobile devices
Information delivery: One of the challenges in providing mobile services to corporate customers is
the amount of data that needs to be displayed. However, by creating mobile-optimised dashboards,
information such as daily and weekly liquidity management reports, cash positions, balances, float
What Banks Should Offer Around Treasury Services
and account activity can all be delivered to ensure corporate treasurers can make investment and
borrowing decisions on the move.
Risk management: Real-time transactional alerts, limit breach alerts and fraud alerts can also be
provided on mobile devices for corporate users, helping them manage risk better.
What Banks Need to Do to Succeed
Bank treasury services for corporate customers can be provided in multiple ways. They fall into two main
models:
Mobile portal and dedicated mobile application model: Banks are optimising their web portals for
access through smartphones, and/or developing applications with built-in security features (such as
digital certificates) that can be deployed on smartphones of corporate customers. In this solution, a
bank owns and controls the service and data delivery. The service and data delivery is through the
usual mobile channels. This model is an extension of the consumer mobile services model.
Mobile application-based cooperation model: In this model banks work with their customers’
corporate IT and use their customers’ secure channels for information and data delivery.
Though it is more efficient and cost-effective for banks, we believe that success with the first model will
continue to be a challenge due to the perceived problem of security and control. By adopting the second
model banks are likely to have more success in providing mobile treasury products. This model meets
security concerns while providing corporates with more control over the delivery of services, without
stifling innovation or creating huge management overheads. However, there are challenges that need to
be overcome in the cooperation model, as outlined below.
Creating Secure Data Links
The bank needs to ensure that there is a secure link available for clients to use to send data to the enduser in real time through their corporate IT channel. The bank will have to develop secure interfaces
and set well-defined policies, which clients’ IT departments can use to develop applications. To begin,
the bank can provide a “starter set” of applications for their clients to use until their own corporate
applications are developed.
Ensuring Scalability
One disadvantage of the cooperation model is that it could necessitate custom solutions for each
corporate client, which would create challenges of scalability for the bank. Technology solutions would
have to be developed in a modular way so that scalability does not become an issue.
The model can be made successful by the sharing of costs between the bank and the client, with both
parties developing and reviewing each other’s applications following a set application development
review and approval framework. The applications can then be developed and deployed to provide realtime access to the bank’s systems while ensuring adherence to corporate security policies.
This model has been successfully deployed by companies such as Apple and PayPal with third-party
application developers.2
Managing Support Cost
In the past banks have tried to set up bank-to-client connections through dedicated portals. However,
these were expensive from a support cost perspective. The application-based approach, however, has
been proven to be a low cost-to-serve model by companies such as Apple, as applications do not need
a high level of customer servicing. Customer service needs would be mainly transaction-based, which is
no different from the support that banks currently provide.
Managing Platform Variability
As each client could potentially choose a different mobile enterprise platform3, banks would have
to create offerings to accommodate this variability. Fortunately, mobile applications in the corporate
world are heavily weighted towards two platforms – BlackBerry and Windows Mobile4, which reduces
the platform variability that banks have to accommodate. By sharing the responsibility of application
development with the clients, banks can further manage platform variability.
Conclusion
2
3
4
For more information about application development for Apple and PayPal respectively, see developer.apple.com and
www.paypal.com.
These include BlackBerry developed by Research in Motion (www.blackberry.com); Android developed by
Google (www.android.com); iOS 4 developed by Apple (www.apple.com/iphone/ios4/) and Symbian developed by
Nokia (www.symbian.org).
Windows Mobile is currently being phased out by developer Microsoft. In its place will be a new platform called Windows
Phone (www.microsoft.com/windowsmobile/en-us/default.mspx).
By implementing a business architecture that can support the development of third-party applications
built on well-defined standardised interfaces, banks can create a mechanism for providing mobile
services for corporate users. PayPal has demonstrated the success of the third-party approval model in
the financial services industry, and Apple and Android have shown remarkable accomplishments in the
mobile market. By bringing together initiatives from these success stories, banks can provide secure
services at an accelerated pace to their corporate customers.
Caroline Lacocque, Head of Client Intergration Consulting, Global Transaction Banking, Asia Pacific, HSBC, Hong Kong
• SWIFT corporate connectivity is an increasingly important solution for standardised corporate-tobank communication, showing significant uptake, particularly in the US and Asia.
• The much-anticipated SWIFT solution for Electronic Bank Account Management (EBAM)
went live earlier this year. This solution aims to simplify and automate the opening, closing and
maintenance of bank accounts.
• Trade for Corporates enables banks to offer their corporate customers a proven and global multibank platform and standard in support of trade and supply chain flows. Banks and corporates
now have a single channel for exchanging standardised corporate to bank trade data.
• SWIFT Secure Signature Key (3SKey) is designed to help authenticate received data, such as
payment instructions, at the level of the individual (e.g. a specific representative in the corporate’s
treasury department).
S
ince the Society for Worldwide Interbank Financial Telecommunication (SWIFT) introduced corporate
connectivity in 2002, more than 650 corporates have connected to the service and these numbers
continue to grow significantly every year.1 SWIFT corporate connectivity has become an important
facilitator for corporates to achieve greater efficiency and control in payment initiation and liquidity
management. It is no longer only an option for global corporates operating a shared service centre or
payment factory; it can benefit a wide range of corporate clients. Using SWIFT to initiate payments and
receive account information enables them to integrate SWIFT into their treasury management systems
and reduce reliance on proprietary bank platforms.
In 2009, the pattern of continuous growth in annual traffic volumes for SWIFT was slighty interrupted,
reflecting conditions in the industry. However, corporate involvement continued to rise in terms of
the number of firms joining as well as the traffic volumes generated. With initiatives such as Alliance
Lite, smaller corporates are finding it easier to make use of SWIFT both operationally and from a cost
perspective. Corporate involvement has been spreading geographically, too. This has been most notable
in the US, where a number of well-known Silicon Valley companies such as eBay, Google, and Cisco
have found the SWIFT value proposition convincing. The same is true in Asia, where the appetite for a
standardised, bank-agnostic financial communication platform is growing steadily. This is partly a result of
1
For more information about SWIFT and the products and services mentioned in this article, see www.swift.com.
the global financial crisis, which has brought about a surge
in the use of message reporting. Achieving improved
visibility on cash positions has been a key priority for
corporates, especially for those who lacked such visibility
during the crisis. One of the first things new SWIFT
corporate customers take advantage of is the ability not
only to receive end-of-day statements and timely, high
quality information on their intraday positions, but also to integrate this information into their applications.
Counterparty risk has also gained a level of importance unknown before the crisis, given that the crisis
actually caused some banks to fail. After years of treasurers trying to reduce the number of their banking
partners and centralising treasury operations, having all their eggs in one basket no longer seemed such
a good idea, particularly if a company is locked into a bank’s proprietary electronic banking solution.
Corporates want easy access to multiple banks. Furthermore, to mitigate counterparty risk, they need to
have a flexible channel in case they need to quickly switch or add banks.
New Initiatives
To make its offering more complete SWIFT is undertaking a number of new initiatives that will ease the
administrative burden on corporates in dealing with their financial service providers. There is a strong
corporate appetite for Electronic Bank Account Management (EBAM) and, although developments in
this area are at an early stage, SWIFT’s EBAM messages have already been accepted as ISO standards.
HSBC has been involved since the early stages of this initiative.
In a related project, SWIFT launched a pilot programme for its digital identity solution (3SKey), with a
view to going live with this solution by the end of 2010. Four banks, nine corporates and seven vendors
are currently involved.
There is also good news on the trade and supply chain side. Banks and corporates now have a single
channel for exchanging standardised corporate-to-bank trade data. Trade for corporates now covers
43 flows for Import and Export Documentary Credits, Guarantees and Standby Letters of Credit. This
more than doubles the original offering made available in December 2008. Further details on these new
developments and initiatives are given below.
While payment processes have largely been automated, bank account management remains surprisingly
manual for most corporates. This is a real issue for banks as well as customers. In response to requests
from the SWIFT community, SWIFT has developed standards for Electronic Bank Account Management
(EBAM), which can be accompanied by electronic attachments where necessary and transported
securely over SWIFT’s content-agnostic file transfer mechanism, SWIFTNet FileAct.
The standards cover four key areas: account opening, closing, maintenance and reporting. Fifteen XML
messages have been developed to cover the scenarios envisaged. Account opening messages are
designed for existing customers to open new accounts at their banks. To some extent, the ability to
complete that process entirely electronically depends on local legislation. In some jurisdictions you still
have to provide a copy of your identity card, but at least you can now exchange this in an electronic way.
Account closing may at first sight appear to be a simple process, but it requires instructions on how to
Electronic Bank Account Management (EBAM)
handle the remaining balance on that account. As for maintenance, SWIFT does not expect management
of the normal characteristics of an account to generate huge volumes of traffic. By contrast, SWIFT
expects mandate maintenance messages to be widely used. These cover issues such as: who can
sign up to what threshold, the combination of signatures required for higher thresholds and the types of
transaction that only particular signatories can perform.
Trade for Corporates
Banks need to offer a multi-bank, multi-business facility to their corporate customers: a single channel for
cash management, treasury and trade finance. This was the priority during the first development stage of
trade finance flows in 2008, when the trade community – banks, corporates and vendors – was already
very involved with SWIFT. Trade for Corporates enables banks to meet corporate customers’ needs in
these areas. Banks and corporates now have a single channel for exchanging standardised corporate
to bank trade data. Banks can also streamline their own operations, processing messages from their
corporates on to the next bank in the chain with minimal handling. In turn, corporates already connected
to SWIFT can leverage this investment using a single channel and communication standard with all their
trade banks. They benefit by saving time and money, adding security and often easing compliance as
they gain a centralised view of their trade transactions worldwide.
Supply Chain Finance
The trend of open account trading, coupled with the growing stress placed on liquidity management, is
spurring demand for banks to provide greater innovation in the world of supply chain solutions. An initial
response to these changing market needs was the launch three years ago of the Trade Services Utility
(TSU), which enables banks to establish a common view of supply chain transaction data and to monitor
events from inception to completion. In 2010, the TSU was enhanced with the launch of Bank Payment
Obligation (BPO) – an irrevocable undertaking given on the part of one bank to pay another, provided
that a number of pre-determined conditions have been satisfied through the electronic matching of
data within the TSU. The first live BPO transaction was issued by the Bank of China on 2 April, 2010.
For BPO to achieve critical mass, however, it must provide the same level of assurance that trading
counterparties associate with traditional documentary instruments. These have well-established and
accredited guidelines, with dispute resolution procedures built around the Uniform Customs & Practice
(UCP) published by the International Chamber of Commerce. A targeted accreditation process with the
International Chamber of Commerce is now under way for BPO.
E-invoicing
A further area of corporate activity ripe for automation is the invoicing process. In November 2009 the
expert group on e-invoicing established by the European Commission set out its vision for this area.
Among other suggestions, its European Framework for e-Invoicing highlights the need to get small
and medium sized enterprises (SMEs) involved in the drive to adoption. It encourages inter-operability
through standardisation and calls for increased EU harmonisation of legal and VAT frameworks. Actions
to implement these recommendations are expected from the European Commission later in 2010.
The Euro Banking Association (EBA) has also organised a financial sector initiative around e-invoicing.
In addition to a working group exploring ways in which the EBA and its community of members may
contribute to pan-European solutions in electronic invoicing, it has also set up a Proof of Concept Group,
where financial sector stakeholders have joined forces with non-bank e-invoice service providers. SWIFT,
meanwhile, has initiated an e-Invoice Ad Hoc Group to explore how to exchange e-invoice messages
over SWIFT’s network and how core SWIFT components can be used to support an inter-operable ecosystem for e-invoicing.
3SKey: Personal Digital Identity
SWIFT Secure Signature Key (3SKey) helps authenticate received data (e.g. payment instructions) at the
level of the individual (e.g. a specific representative in the corporate’s treasury department), rather than
at company level.
When a bank interacts with their corporate customers
through electronic banking channels, it may need to
authenticate received data at the level of the individual(s)
authorised to serve instructions to it. For example, a
specific individual in the corporate treasury department
must approve payment instructions. In practice, banks
and their corporate clients must often manage and
use multiple and different types of personal signing
mechanisms (for example, multiple tokens with different passwords). Using and maintaining different
authentication methods in parallel adds to complexity and leads to higher operational risk and cost.
With the 3SKey solution, SWIFT supplies subscribers (typically banks) with PKI-based (Private Key
Infrastructure) credentials for redistribution to their 3SKey users (typically, corporates). 3SKey users then
use these credentials to sign messages and files exchanged with one or more 3SKey subscribers over
any mutually agreed channel.
Conclusion
SWIFT for Corporates has become a global trend, not just for large corporations but for midcap
companies too.
Promoting collaborative work and standardisation, HSBC is the leading bank in providing SWIFT
corporate connectivity, with SWIFT FIN users in 35+ countries and SWIFT FileAct users in over 20.
With the aim of providing corporates with the most efficient solutions, HSBC is involved in many SWIFT
initiatives and corporate access advisory groups, such as the legal working group, and in areas such as
XML early-adopters, EBAM and digital identity. HSBC is also active in SWIFT advisory groups ranging
from trade finance and securities to standardisation in industry payments, as well as being represented
at the SWIFT board level.
Financial Risk
Management in a
Hong Kong Corporate
Treasury
• Hysan’s investment property portfolio in
Hong Kong comprises over four million
square feet of high-quality office, retail and
residential space.
• The company is a regular award winner for
best practice and is ranked among the top
organisations in the Asia Pacific region for
corporate governance.
• Hysan uses an IT2 treasury management
system to support its treasury operation and
as a control and reporting tool.
• The company believes that effective
counterparty risk management should be a
permanent component of corporate treasury
best practice.
David Woo Kar Wai, General Manager, Corporate Treasury, Hysan Development Co. Ltd., Hong Kong
H
ysan Development is a real estate investment, management and development company based
in Hong Kong, operating in the office, retail and residential sectors. Its mission is to build, own
and manage quality properties and to provide premium accommodation and services to its occupiers.
Hysan’s investment property portfolio comprises over four million square feet of high-quality office, retail
and residential space. It is the largest commercial landlord in Causeway Bay.
Hysan is strongly committed to best practice in corporate governance. As evidence of this commitment,
the company has won a number of Best Corporate Governance Disclosure Awards given by the Hong
Kong Institute of Certified Public Accountants in recent years, including the top Diamond Award (NonHang Seng Index Large Market Capitalisation category) in 2009. It was also in the Top 5 Corporate
Governance in Greater China and Top 5 Corporate Governance in Asia-Pacific categories of the IR Global
Rankings 2009.
The 2008 global financial crisis put the spotlight on treasury operations worldwide. This article offers a
summary of Hysan’s core treasury operations and a review of some of the current and evolving aspects
of financial risk management and best practice in corporate governance.
Hysan’s Daily Treasury Operations
Hysan runs a corporate treasury department that performs a range of cash management, asset
management and hedging operations in support of its core commercial operations and in compliance
with a corporate strategy of keeping risk and return in balance. Its treasury activities are supported by an
IT2 treasury management system (TMS), which has been in operation since 2004. Hysan introduced a
TMS to eliminate unproductive data processing tasks and reduce errors. The company’s objective was
to improve the quality and timeliness of management and operational reports and to provide complete
audit trails for all treasury transactions. These efficiencies enable the treasury team to focus on its duties
of financial risk management.
Hysan’s treasury activities are conducted by a team of six professionals. With the assistance of IT2,
duties are clearly segregated and a system of checks and balances is maintained. At a high level,
operations are focused on liability management, asset management and the hedging of market risk.
Liability Management
Hysan’s liability management operations are centred on generating dependable finance across the
maturity spectrum. The instruments used include loans of various tenors, bank facilities and the issuance
of medium-term notes. The company uses IT2 to capture the information and to manage any specific
features, such as fixed-rate, floating-rate or zero coupon. Each principal and interest flow can be modified
individually to tailor it to meet specific requirements, either by changing the date or amount or adding
additional flows where relevant.
Asset Management
In terms of asset management, Hysan invests in bank deposits – both plain and structured – and in
bonds, equities and bills. The company uses its TMS to derive the expected cash flows from its various
investments and to keep track of credit exposures to all counterparties. With this information, the
treasury is able to generate budgeting and forecasting reports to determine the cash-flow picture and
manage the organisation’s liquidity accordingly.
Hedging Operations
The third core operation of Hysan treasury is hedging market risk, in accordance with the treasury’s
policy to balance risk and return prudently and effectively. The instruments used for this are interestrate swaps and cross-currency interest-rate swaps. It also uses some foreign exchange forwards and
forward-rate agreements for hedging purposes.
*The data shown in the sample reports and processes is for illustrative purposes only and is not related to Hysan’s financial
activities, exposures or positions.
Figure 1: IT2 Dashboard of Interest Rate Exposure Hedging Management*
Reporting
The key management and operational reporting generated from Hysan’s TMS includes:
a daily maturities report;
a hedging report (including cash flow/fair value hedge disclosure);
interest accruals; and
a credit exposures report.
Figure 2: Position Analysis Workbench*
Other Treasury Operations
Other important treasury operations include treasury accounting and hedge accounting. IT2’s nominal
ledger module is linked to the SAP enterprise resource planning system for the export of accounting
journals relating to interest accruals, mark-to-market valuations, treasury cash flows and hedge
accounting generated by the TMS.
Figure 3: IT2 Integrated Accounting Process Map*
As Hysan’s corporate treasury policy has evolved, a series of risk management processes has been
developed and implemented as a central element of managing risk and return in compliance with
corporate governance requirements. Hysan currently divides risk analysis into the following categories:
counterparty risk;
currency risk;
country risk;
liquidity risk; and
price risk.
Risk Management
Counterparty Risk
Hysan defines counterparty risk as the risk of the company incurring a loss as a result of the default of a
counterparty that has:
issued, endorsed or promised to pay on maturity for a security in which Hysan has invested; or
accepted a deposit from Hysan; and/or
entered into a hedging activity with Hysan with expected future cash flows.
The first two occurrences would naturally expose Hysan to principal loss, or at least to delay in
repayment, with negative consequences for liquidity. The primary general effect of the third class of
default is that it means that a hedge is eliminated, and so the original exposure risk is restored.
Other Forms of Risk
Hysan also analyses exposures to specific countries, currencies and geographic regions, restricting
permitted exposures within the boundaries of treasury policy. It also analyses and manages liquidity
risk to ensure that it maintains sufficiently diverse financing sources to ensure access to any necessary
funding. Finally, the company is of course exposed to market price risk in its bond and equity
investments, which it manages in line with the requirements of its treasury policy.
Counterparty Risk Management
Hysan’s treasury policy requires that the total counterparty limit for individual counterparties be set
according to the credit ratings assigned to them by the international rating agencies Standard & Poor’s,
Moody’s and Fitch. Company policy defines total counterparty exposure (TCE) as the sum of:
original principal of investments (e.g. deposited amount), plus
current credit exposure of outstanding hedges (i.e. the positive mark-to-market values), plus
potential future credit exposures (possible future exposures based on tenor, notional amount and
instrument type).
Which produces the formula: TCE = investment + mark-to-market values (positive) + potential future
exposures.
The Role of Technology
As mentioned, Hysan uses an IT2 TMS to support its treasury operation and as a control and reporting
tool. The information stored in the database may be used to check limit availability for different
counterparties before dealing, to help avoid the risk of actually breaking a counterparty limit. In the course
of the deal input workflow for all classes of instrument, the system updates the counterparty exposure
automatically. Additionally, the system calculates the mark-to-market value together with the potential
future exposure (using a self-set formula). This, together with the investment amount, derives the TCE.
The system also acts as a controlling tool: as the counterparty limits are maintained within the system,
if a deal is detected that would lead to breaking a limit, a warning signal will be automatically issued and
additional authorisation will be needed to process the deal. All of this is logged on the audit trail and can
be reported to management. If there is a change in counterparty limits, Hysan’s treasury can execute
an instant scan to check whether counterparties are above their limits, so enabling the team to decide
promptly on required follow-up actions.
Conclusion
Analysis of the financial crisis has led some treasuries to review the use of more market-sensitive risk
indicators to supplement classic counterparty credit ratings. For example, the US-based Association of
Finance Professionals recommends the use of credit default swap (CDS) spreads as an additional, fastmoving tool to monitor changes in counterparty creditworthiness. Although there may be concern about
its liquidity and representation, this is something that treasuries with relatively high levels of financial
exposure should perhaps be considering in addition to the use of credit ratings.
The increased importance and visibility of counterparty risk management will not diminish even as
the financial crisis fades into history: effective management of such risk is a permanent component of
corporate treasury best practice operations.
Collaborating to Improve
Customer Connectivity
• Treasurers and finance managers require an
end-to-end solution for financial processing
that is convenient, secure and robust.
• To fulfil this need, HSBC, SAP and SWIFT
collaborated to produce HSBC Connect
to SAP, which provides a fully integrated
environment for financial processing
with host-to-host or SWIFT connectivity
embedded within the clients’ SAP
environment.
• As one of four customers currently using
HSBC Connect to SAP for their live
operations, STATS ChipPac Ltd. now enjoys
a 30% cost saving annually as well as
enhanced processing efficiency.
• The second iteration of HSBC Connect to
SAP will provide an even stronger value
proposition and ease of implementation, and
will support multi-bank connectivity.
Charles Henry Dubarry de Lassale, Global Transaction Banking, HSBC Bank plc, UK; David Campbell, HSBC SAP
Global Account Executive, SAP UK, and Michael King, Global Client Director for HSBC, SWIFT.
A
s the internal processes of businesses become more sophisticated and the options for connecting
with bank systems more numerous, it is increasingly evident that the integration between the
technology environments of corporates and banks is the weak link in the end-to-end processing of
core financial transactions. No matter how detailed the information that is stored in a bank or corporate
system, the information becomes worthless if it cannot be exchanged completely and consistently.
For some time, bank-to-corporate integration has been a key focus for HSBC, SAP1 and SWIFT2.
Despite a broad range of integration solutions, each of our three organisations recognised that the
existing integration capabilities could be enhanced. In particular, we wanted solutions that would work
seamlessly with those of our customers and facilitate efficient processes both within and beyond our
own organisations.
While not every corporate banking customer uses SWIFT to connect to their banks, HSBC recognised
that SWIFT had become the industry standard for bank-to-bank and, increasingly, bank-to-corporate
connectivity. SWIFT has an extensive footprint across corporate functions such as cash management,
trade, foreign exchange and asset management. HSBC therefore decided to work with SWIFT and
SAP, a leading provider of enterprise resource planning (ERP) systems, to develop a fully integrated
environment for financial processing with host-to-host or SWIFT connectivity embedded within the
clients’ SAP environment.
1
2
For more information about business software provider SAP and SAP’s applications, see www.sap.com.
SWIFT (Society for Worldwide Financial Telecommunications) is the cooperative organisation created to facilitate the
transfer of information and payment/advice instructions between member banks, securities organisations and corporate
customers. For more information about SWIFT and SWIFT Corporate Access (mentioned later in this article), see
www.swift.com.
A Collaborative Approach to Connectivity
Each of our three organisations constantly strives to enhance services to its customers. Because all
three partners were leaders in their respective fields, we knew that collaboration was logical and had the
potential to create the innovative, secure and easy-to-use financial processing environment that would
lead to greater customer satisfaction. Given that many SWIFT and HSBC customers use SAP solutions
as their ERP platform, we were confident that there would be considerable demand for a fully integrated,
streamlined connectivity solution based on SAP.
The result of this collaboration was HSBC Connect to SAP. Based on the SAP NetWeaver® Process
Integration (SAP NetWeaver PI) technology, which provides the capability for integration with external
banking tools, HSBC Connect to SAP involves a wide range of banking connectivity services, as
illustrated in Figure 1.
Figure 1: Banking Connectivity Services Included in the HSBC-SAP-SWIFT Partnership
Treasury Services:
Cash management
• Streamline process
through confirmation,
matching, settlement
• Electronic Bank
Account Management
(EBAM)
• Support for in-house
cash
Fx management
• Automated
reconciliation to AP/AR
• Streamline
process through
to confirmation,
matching, settlement
Trade Finance:
• Automated processing
of letters of credit,
guarantees
• E-invoicing
• Payments and
receivables financing
Factoring:
• Processing of factoring
and reverse factoring
transactions
• Etc
Asset Management:
• Automated processing
of funds transfers
Regulatory Reporting:
• Audit reporting
Phase 1
Phase 2
Phase 3
Banking Services Roadmap –A Journey Towards a Richer Service Portfolio
Source: HSBC, SAP and SWIFT
Payment Services:
• High-value
payments (inter and
intra-company)
• Bulk or batch
payments
• Cheque outsourced
services (COS)
• ACH
• Account statements
(intraday)
• Acknowledgements
• Automated
reconciliation (ERP to
bank and vice-versa)
• Payments monitoring
and exception handling
• Support for
connectivity to service
bureaux, SWIFT,
host-to-host,
SWIFT Lite
• Support for multiple
banks
• Support for payments
factories and centres
of excellence
• Personal digital identity
Four customers now use HSBC Connect to SAP for their live operations, with a single environment
combining internal processes and bank connectivity to support financial processes from end to end.
Having introduced a wide range of services through HSBC Connect to SAP, we further expanded the
depth and scope of our integration. With an increasing number of businesses using SWIFT Corporate
Access to connect with their banks, it was important that we developed the same quality of client
experience irrespective of whether a client uses HSBC’s proprietary bank connectivity tools (such as
HSBC Connect) or SWIFT. We also wanted to cater for businesses with multiple banking relationships.
Consequently, the second iteration of HSBC Connect to SAP is currently being designed to provide an
even stronger value proposition and ease of implementation. For example, the new version will support
multi-bank connectivity as well as advanced HSBC-specific services.
Another major development in the new version is the transition from the SAP-proprietary tool SAP
NetWeaver PI to SAP Banking Communications Management. This has a variety of advantages,
including the ability to be developed in a consistent and controlled manner using industry-standard
payment formats. By leveraging this solution in combination with SAP In-House Cash and SAP Treasury,
clients gain the benefit of an all-encompassing, multi-bank solution for optimising corporate treasury
and cash management processes. Furthermore, by blending HSBC’s knowledge of banking services
with SAP’s technical expertise, we can quickly add new services in accordance with evolving customer
demand. For example, while initially HSBC Connect to SAP supports cash management services, these
will quickly be supplemented with the additional capabilities outlined in Figure 1.
Proven Benefits
Maintaining, accessing and connecting multiple systems are key obstacles to efficiency for many
organisations. The HSBC Connect to SAP pilot programme has demonstrated how these obstacles can
be overcome. Pilot participants have cut integration costs by half and enjoyed a rapid payback of their
remaining project costs. They also improved process efficiency substantially, while reducing the need
for staff training. Security, integrity, and consistency of data have all been enhanced, enabling timely,
automated payments processing and reconciliation.
An Ongoing Collaboration
Corporate treasurers and finance managers need an end-to-end solution for financial processing that
is convenient, secure, and robust, supported by business partners that they trust. Consequently, the
market response to the first iteration of HSBC Connect to SAP has been very positive, with a high
degree of interest in the second version.
In particular, clients have been encouraged by the depth of the collaboration between HSBC, SAP and
SWIFT and our ability to deliver joint services that are integrated with our individual business functions
at both a technical and a business level. Each has a solid business case with measurable successes and
tangible benefits, including reduced costs for integration and client implementation. This strong business
case, combined with our ongoing commitment to enhance the convenience and quality of the corporate
banking experience points to a long and proactive collaboration.
ERP Integration for Liquidity
Optimisation at STATS ChipPAC
STATS ChipPAC Ltd. is a leading service provider of semiconductor packaging design, bump,
probe, assembly, test and distribution solutions. Headquartered in Singapore, the company’s
manufacturing facilities are located in various locations across Asia, with a test pre-production
facility in the US.3
Tham Kah Locke, Vice President Corporate Finance, STATS ChipPAC Ltd., describes the
implementation of HSBC Connect to SAP as part of the company’s cash and liquidity optimisation
strategy.
The business environment has undergone significant changes in the past two years. Like many
corporates, STATS ChipPAC was seeking to optimise its liquidity management by enhancing visibility
and control over cash flow. With 89 accounts in 46 banks across seven countries, achieving efficient
bank connectivity and effective integration was key to our long-term cash management strategy.
Prior to the implementation of the new strategy, the existing in-country approach to cash and liquidity
management resulted in a fragmented approach to electronic data transmission to and from the
banking partners. Although we have electronic payment interfaces from SAP to our banks in some
locations, the data flow was typically one way. The time and cost associated with processing invoices
and making payments differed in each location, and our processes typically included a significant
amount of manual input and reporting. Consequently, the implementation of a more integrated cash
and liquidity solution led to opportunistic cost savings in IT and finance.
HSBC Connect to SAP
Having evaluated the capabilities of various potential banking partners, we found our strategic fit with
HSBC. We recognised that the bank’s newly launched HSBC Connect to SAP solution would be an
efficient way of leveraging our existing investment in SAP, and would enable us to achieve straightthrough processing, transparency and control over the payments process.
3
4
For more information about STATS ChipPAC, see www.statschippac.com.
Idoc (Intermediate Document) is an SAP format for transferring the data for a business transaction. ISO 2022 is
the standard set by the International Organisation for Standardisation (ISO) to provide the financial industry with
a common platform for the development of messages using XML (Extensible Markup Language), the standard
language for machine-to-machine communication across the Internet.
As standardisation at a global level was an important element of our strategy, the solution included
conversion from SAP IDoc to XML-based ISO 20022 payment formats,4 which allows enriched data
and consistency across our locations. The solution would require less IT support than our existing
fragmented systems, further reducing costs, and we recognised that as manual payments processes
were reduced, our staff would have more time to dedicate to other value-added activities.
Implementing the Solution
It took around three months to implement HSBC Connect to SAP across seven countries, with a
further three months to fully align our internal infrastructure, such as vendor master database records
and SAP account codes to facilitate auto-data transmission and reconciliation. HSBC supported
STATS ChipPAC throughout the process with a dedicated team of integration and implementation
managers. The bank also provided full transition management services throughout, including the
technical installation of SAP Netweaver PI along with configuration and testing of the HSBC Connect
to SAP solution. In addition, it helped us meet our SAP ERP challenges and offered expert guidance
on streamlining payment processes and automatic reconciliation in each of the countries included
in our project. HSBC also facilitated our Sarbanes-Oxley5 compliance audit for the HSBC Connect to
SAP solution.
The Solution in Practice
The process of transmitting and receiving data is now fully automated and standardised across our
business. Payment files in SAP are transmitted automatically through HSBC Connect for processing
as soon as the appropriate approvals have been obtained, without the need for manual upload of
payment files, and the boundaries between SAP and HSBC are seamless to our users.
Balance and transaction reporting is also retrieved in a timely and comprehensive fashion, giving us
visibility of cash across the business and, as we use standard formats, we can now reconcile a very
high percentage of payments and collections automatically, which are then posted automatically in
SAP.
Addressing the Challenges
Inevitably, a project of this scale and complexity brings challenges and lessons learned along the
way. From an implementation standpoint, management commitment is essential to project success.
Having secured management sponsorship, a clear and disciplined approach to project management
is essential, but there needs to be flexibility to deal with unexpected challenges. A project of this
nature is likely to be unfamiliar to most project participants, so the banking partner’s full support is
vital to provide advice and fill knowledge gaps. We needed to make sure that our staff understood
fully how new business processes and technology would operate in practise, and ensure sufficient
training to optimise efficiency, productivity and staff satisfaction.
For a multinational business, ensuring that payments processing is conducted according to local
market practice in each country of operation is essential. Therefore, when implementing standard
payment templates, there needs to be flexibility to include custom data fields to satisfy local
requirements. Local clearing mechanisms and cut off times should also be observed. Again, the right
banking partner is essential to provide expertise on local regulatory requirements and conventions,
and adapt the standard payment process to support these obligations. Differences across regions
also extend to exchange controls, such as in China, Malaysia, Thailand, Taiwan and Korea. It is
therefore important to involve tax and legal advisers to ensure that the proposed structure does not
contravene exchange controls or tax rules in the relevant jurisdictions.
5
Sarbanes-Oxley refers to the “Public Company Accounting Reform and Investor Protection Act” passed in the US in
2002, setting new or enhanced standards for all US public company boards, management and public accounting firms.
As we had been working with different banks in various locations, the implementation of HSBC
Connect to SAP requires an extensive exercise to complete and standardise the input fields and
validate the existing vendor database. The creation of custom test plans together with HSBC was
essential to validate the alignment of our central database in support of the automation aspect of
the project.
Achievements and Outcomes
The project at STATS ChipPAC has proved a major success. HSBC Connect to SAP has clearly
supported our strategic objectives. Some of our achievements include:
Corporate visibility
By consolidating our accounts with a single bank, the time and effort required to manage our banking
relationship is greatly reduced and maintaining accounts is simpler. By using HSBC Connect to SAP,
we have full visibility over accounts and payments within our SAP environment, enabling greater
control over payment and cash management processes within a single environment.
Compliance and control
By standardising payment processes across all locations, policies and approval requirements can
be consistently applied, and our systems provide a full audit trail of user actions. This standardised
approach, with visibility and control across the company, has been instrumental in ensuring good
governance and internal control compliance.
Process efficiency
We have reduced manual intervention in the payment process considerably and, with greater
automation across the business, we have limited the risk of processing errors and increased
the proportion of automatic reconciliation and account posting significantly. As we now have
two-way communication with HSBC, we can obtain rapid information on payment status and timely
information on account balances and transactions, enabling us to make more rapid cash management
decisions.
Cost savings and productivity enhancements
We have derived significant cost and time savings from implementing the HSBC Connect to SAP
solution, which we have estimated at SGD500,000 each year. When added to the intangible benefits
of the project, it has proved a highly successful initiative and provides our company with a foundation
for our current and future cash and liquidity management requirements. Based on the success of the
project so far, we are considering extending our infrastructure further into the collections process,
implementing closer connectivity with our customers and further optimising the services that
treasury provides.
“Collaborating to Improve Customer Connectivity” and “ERP Integration for Liquidity Optimisation at STATS ChipPAC” (which
appears here as an excerpt) are also included in HSBC’s Guide to Corporate Connectivity.
Unlocking
Asia’s Potential
Acquainted Again:
Middle Kingdom and the Middle East
• Trade ties between the Middle East and China are long-standing. Today they are stronger than
ever, with oil imports to China contributing the lion’s share of trade growth. Sales of higher-value
consumer goods and of capital equipment to the Middle East’s developing economies are also
on the increase.
• While the Middle East has a small trade surplus over China, China has now replaced America as
the top exporter to the region.
• Most of the purchasing power from the Middle East comes from thousands of individual traders,
rather than governments or multinationals.
• The UAE, and Dubai in particular, are positioning themselves as the launch pad for China trade in
the region. Many UAE traders expect to use the RMB for trade settlement in the near term.
A
t least they both have a genuine claim to Silk Road status. Unlike most of the ‘new’ Silk Roads
cropping up in trade ministry press releases around the world, China and the Middle East can point
to the real thing: a shared heritage in the camels and the caravans that once linked the traders of the
Near and Far East. But what about Sino-Middle Eastern ties today? Week in China (WiC) looks below at
how they are developing.
For Silk, Read Oil…
Two-way trade tripled in the five years to 2009 to USD135bn. That leaves some way to go on predictions
made three years ago by consultancy McKinsey (pre-financial crisis, admittedly) that bilateral flows would
surge to at least USD350bn by 2020. The annual growth rate of around 9% needed to reach this figure
looks achievable considering growth in the past decade has been over 20%, says Kersi Patel, Regional
Head of Trade and Supply Chain for HSBC in the Middle East and North Africa.
Never a factor on the original Silk Road (but by far the most important driver today for bringing that
McKinsey target into range) is oil, which makes up about 45% of the bilateral total.
China is already the largest importer of Middle Eastern crude but its consumption is predicted to grow
from 8 to 16m barrels a day by 2030. Close to 40% of China’s annual energy imports already come from
the region.
When it first began to tap Middle Eastern reserves, Oman
and Yemen were often the first port of call as Chinese
refineries were then better configured to handle the lowsulphur content of their crude. But capacity has been
upgraded over the last fifteen years, and Saudi Arabia and
Iran are now China’s two largest oil suppliers in the region.
Energy-related sales dominated the USD61bn of exports
to the Chinese in 2009.
Co-investment efforts are ongoing: Saudi Aramco is the partner of Sinopec, the Chinese oil firm, in a
USD5bn refinery in Fujian province, and the Saudi chemicals giant Sabic has a USD3bn petrochemical
joint venture in Tianjin, which began operations in May.
And Chinese Exports?
Many of the Middle East’s oil dollars end up being spent on Chinese imports. China replaced the
Americans this year as the top exporter to the region, but the Middle East maintains a small trade
surplus.
Trade ties really began to deepen about ten years ago, says Ben Simpfendorfer, an author and former
diplomat who has written widely on the theme of a new Silk Road partnership. He points to a couple
of key trends (other than oil consumption) in bringing Sino-Middle East trade back to the boil after
centuries of much slower burn.
The first was the impact of the September 11 terrorist attacks. The aftermath saw a cooling of relations
between Middle Eastern states and their traditional partners in the West. This had commercial
ramifications, and provided more elbow room for the Chinese to establish new links with Middle Eastern
partners, and for trade talk to prosper.
Simpfendorfer illustrates the point simply. Shortly after September 2001, with the US focused on
establishing a new Department of Homeland Security, Beijing began relaxing visa restrictions for various
Middle Eastern nationalities. The message was that China was “open for business”, something which
has been conveyed in the years since. China’s embassy in Cairo claims to issue visas to Egyptian citizens
overnight, for instance. It takes the same nationals 18 days to hear back on visa applications for the US.
The second theme is that it was smaller, entrepreneurial businessmen who were quickest to grab
the new opportunities. Yemeni, Palestinian, Egyptian and Syrian buyers were the first to travel to
China in search of goods to buy for export. As such, it was thousands of individual traders (rather than
governments or multinationals) that reignited Silk Road contact.
One city in particular has prospered. Yiwu is a relatively small town in the Chinese context, about four
hour’s drive from Shanghai (for more see WiC9). But it has become a commercial crucible for the new
era in Silk Road trade, attracting thousands of Arab buyers to its warehouses and exhibition halls.
Astonishingly, Simpfendorfer says that Yiwu now welcomes more Middle Eastern visitors than the entire
US.
But Isn’t That Trade in Low-Value Goods?
True, Yiwu has made its name selling smaller wholesale lots of cheap consumer items. Think DVDs,
cigarette lighters and transistor radios. Much of the growth in Chinese goods sold in the Middle East has
come from similarly low-priced items, like clothing and home electronics.
Of course, large volume can still make this trade
significant. Yiwu’s authorities claim the city did almost
USD8bn of business in 2009, the vast majority with
developing markets.
It also pays not to belittle smaller beginnings: Chery Auto, a leading Chinese carmaker, says that it was
contact with a Syrian car dealer that pushed it into its first real export experience.
According to a McKinsey Quarterly interview with Chery CEO Yin Tongyao, the company had no
immediate plans for export when it was first approached by the Syrian dealer in 2001. And with no
international experience, it nearly turned down his request for just 10 cars for export.
The year after, the dealer was back, buying a hundred more vehicles. And the year after that, he wanted
a thousand. Gradually, buyers in Iran and other neighbouring markets began to show interest and Chery
had its Middle Eastern “breakthrough,” says Yin.
Chery now operates joint venture assembly plants in Egypt and Iran, and other Chinese automakers are
following its export example. All are still to make significant inroads in international markets. But Syria,
Egypt, Iraq and Iran are at the top of the list as the pioneers in their sales strategy.
Imports of other higher-value products are also on the up, says Patel from HSBC, which has a strong
presence in eight of China’s top 10 trading partners in the Middle East and North Africa. In part that is
because Chinese brands are becoming better known. Haier, a white goods manufacturer, is now one of
the most respected in the region.
Sales of capital equipment are also increasing. Patel’s example is the Union Railway: a USD11bn
transport scheme aiming to link all seven emirates of the UAE, which plans a phased roll out starting in
2013.
The first phase of the project is freight-focused and will link gas fields to processing facilities and ports.
But the full 1,500km network will include lines extending from Abu Dhabi through the other emirates of
Dubai, Sharjah, Umm Al Quwain, Fujairah, Ras Al Khaimah and Ajman. The eventual goal is to connect
the UAE to Saudi Arabia and Oman.
In May, China’s Railways Ministry signed a deal with local officials to plan, develop and build the network.
The Industrial and Commercial Bank of China is expected to provide financing and export credits, and
Patel sees this as a good indicator that other Chinese corporates will bid on the engineering and supply
contracts.
This financing-driven strategy looks like it’s becoming more commonplace. A similar scheme was in the
news in August, when the Oman Shipping Company announced that it will buy new tankers to ship iron
ore from Brazil. The vessels will be manufactured by Jiangsu Rongsheng Heavy Industry Group, with
financing from China’s Export Import Bank.
So Business is Expected to Grow?
One market looking to prosper from Chinese exports is the UAE (and Dubai in particular). HSBC’s Patel
says that the UAE, now the third largest re-export centre globally behind Hong Kong and Singapore,
continues to invest in its trade related infrastructure, and has positioned itself as the launch pad for
Chinese commercial activity in the region.
In part that’s because Chinese firms are already more active in the UAE than elsewhere, especially after
the various booms in infrastructure and real estate in the emirates over the past 10 years. There were
thought to be at least 150,000 Chinese nationals in the UAE before the Dubai debt crisis gripped the
financial markets in late 2008. Many of them originally hail from Wenzhou, generally regarded as one of
China’s most entrepreneurial cities. Despite the downturn, most have stayed on.
Dubai also boasts its own equivalent of China’s Yiwu – DragonMart, a 150,000 square metre wholesale
depot offering another gateway for sales of Chinese products. Opened in 2004, it claims to be the largest
trading centre for Chinese goods outside mainland China itself, and features thousands of suppliers of
appliances, household items, building materials, furniture, toys, garments, textiles and footwear.
Trade flow looks like it’s continuing to pick up. Importers and exporters from the UAE were the second
most optimistic from 17 countries surveyed in the most recent HSBC Trade Confidence Index released
late last month. That meant that their expectations of trade prospects over the following six months
were higher than anyone bar the Indians.
Admittedly, confidence had slipped slightly on the previous survey (from six months ago). But it still
came in well above the global average and UAE has consistently been in the top three most optimistic
countries since the surveys started in early 2009. Also, the Greater China region featured as a
commercial partner for UAE traders more frequently than any other except the rest of the Middle East
(almost half of respondents expected to do business with the Chinese, versus 30% with the US and
26% with the UK).
The HSBC Trade Confidence Index had another key insight. Among UAE traders, 6% expected to start
using the renminbi (RMB) for trade settlement purposes in the six months ahead. Patel’s team has
already geared up to support such transactions, with the first RMB-denominated trade deal completed
in late September, between Royal Furniture Group, one of the largest furniture firms in the UAE, and its
Chinese suppliers.
HSBC expects as much as 30% of China’s annual trade with the region to be settled in RMB within five
years, says Patel. So the Royal Furniture Group deal looks like the first of many.
Back to the Silk Road For Lessons…
So much for the future. For Silk Road specialist
Simpfendorfer, we should also be looking at the past to
see how trade ties between the Chinese and the Arab
world are going to develop.
Much is relatively new, of course, especially the oil flow.
But traders are also uncovering ancient patterns in trade
and commerce. Even Yiwu’s recent rise to prominence mirrors the cross-cultural contact of the past.
Traders from Yemen’s Hadramawt region were among the first to arrive in the city in large numbers.
Which was true to form: the Hadramis, from the tip of the Arabian Peninsula, have sailed Asia’s oceans
for centuries as merchants.
It’s a single example of the Silk Road’s enduring relevance, and a heritage that looks like it’s resurfacing
as the global economy rebalances.
Others are picking up on a similar theme, although always to promote a modern-day agenda. One of
China’s poorest regions – the Ningxia Hui Autonomous Region – was in Dubai last month as part of a
government-sponsored trip. It announced that it would be investing in a sales complex in the city, to
promote exports of textiles, agricultural products and halal foods. Ningxia is home to many of China’s Hui
Muslim minority and its representatives made much of the bolstering of “centuries-old” relationships.
Editor’s note – the Greater China / MENA trade data quoted above is from the IMF’s official
statistics.
Reprinted courtesy of Week in China.
HSBC clients can comment on this article by scanning this barcode.
A Changing
Approach in Asia
Mahesh Kini, Head of Cash Management Corporates, Asia Pacific, Deutsche Bank
T
he corporate cash management landscape is changing across the globe, but it is arguably in Asia that
the most profound developments are taking place. Exponential growth in the region and increased
emphasis on working capital management are spurring a new and more integrated approach to cash and
treasury management.
New Approaches to
Cash and Supply Chain Management
Asia has come a long way since the 1997 Asian financial crisis. The significance of the region to the global
economy is growing, fuelled by strong domestic and intra-Asia growth. According to a report by Deutsche
Bank in September 2010 on “The widening growth gap”, Asia (ex-Japan) is forecast to grow at 8.8%,
compared to 4.3% globally.1
Despite Asia’s relative resilience during the financial crisis, treasurers are not letting their guard down.
Priorities have changed and working capital management, together with greater sensitivity to counterparty
risk and the long-term sustainability of key trading partners, is increasingly critical for corporate treasurers.
Managing the treasury requirements of Asian subsidiaries from offices in Europe or the US is also
becoming less viable due to the lack of uniformity in practices in Asian financial markets. These changes
are taking multinational corporations (MNCs) to a new level of maturity with respect to managing cash in
Asia, as concepts such as payment factories and shared service centres become increasingly common.
Consequently, a new and more sophisticated approach to cash and supply chain management is
taking shape – one that is characterised by the fusion of the physical supply chain with the financial
supply chain and the need to re-engineer existing cash management arrangements in order to deliver
further efficiency gains. MNCs, at the centre of this emerging financial ecosystem, play a critical role in
supporting the activities of smaller counterparties such as suppliers and distributors, who are now part of
an extended working capital cycle.
1
Deutsche Bank’s Emerging Markets Monthly on “The Widening Growth Gap”, 10 September 2010
• Asian gross domestic product growth
is outperforming the global average.
Against this background, cash and treasury
management is becoming increasingly
innovative.
• Changes in the management of working
capital are most evident through the fostering
of mutually beneficial arrangements
between buyers and sellers.
• Technological developments enable
process re-engineering. This, in turn, gives
corporates greater control over their working
capital.
• Offshore trade settlement in renminbi
is a significant step towards renminbi
globalisation and one that will benefit both
buyers and sellers.
Trends and Changing Attitudes
This new financial ecosystem marks a change in attitude towards managing working capital and relations
with smaller counterparties such as suppliers and distributors. The zero-sum approach – one party’s loss
is another party’s gain – is gradually being replaced by the financial ecosystem approach, in which the
key focus is business sustainability through mutually beneficial agreements.
Figure 1: The New Financial Ecosystem
Partner Bank
Supplier
financing
Favourable
financing
Distributors
Favourable
financing
MNC
Improve DSO
and DPO
Suppliers
Improve DSO
and DPO
Process
re-engineering
Partner Bank
Source: Deutsche Bank
Benefits for MNCs
■ Better payment terms/ pricing
■ Improved working capital effectiveness
■ Integrated accounts payable process
Benefits for suppliers
■ Additional source of funding
■ Acceleration of accounts receivable at favourable rates
■ Timely funding
■ Debt and days sales outstanding reduction (DSO)
■ Increased ability to source trade credit
This, in turn, is contributing to growing demand for innovative financial supply chain management
solutions in the region. Supplier financing is one such solution: it works on the principle of an extended
working capital cycle involving the buyer, sellers and even distributors. On the one hand, sellers gain
access to favourable receivables financing, leveraging their buyer’s strong credit standing. At the same
time, buyers are able to maximise supplier loyalty and negotiate better settlement terms to fit their
underlying cash flows. This translates into enabling the parties in a trading relationship to strengthen their
balance sheets, as well as optimise key performance metrics such as days payable outstanding (DPO)
and days sales outstanding (DSO).
Alongside this shift in attitude is treasurers’ escalating interest in process re-engineering, which focuses
on streamlining existing procedures and structures to further maximise cost and operational efficiency. In
particular, they are attaching great importance to banking products and services that will give them realtime access to account information and automated reconciliation. To help corporates replace their manual
receivables reconciliation process with an automated system for immediate reconciliation, banks are
using mobile devices to capture information at point of collection, which will help corporates reduce their
DSO and collection risks, as well as giving them greater control over their working capital. In India, where
the majority of payments and settlements are cheque-based, such developments are vital for MNCs in
improving their risk management and overall efficiency.
In the area of receivables, another such re-engineered process is to assign a payer identification code
(Payer ID) to each payer. Instead of quoting their credit account number, payers quote their Payer ID
when initiating payment, which enables corporates to match incoming credits against payers with
certainty. This accelerates the collection cycle and improves time-consuming reconciliation processes.
From a treasury management point of view, Asia will remain a highly fragmented market, with different
currencies and legal jurisdictions and few harmonisation initiatives such as those found in the European
Union. As a consequence, cash management in the region will remain complex and multi-currency
structures that allow the straightforward consolidation of positions across the region are expected to be
favoured by MNCs.
The Renminbi Trade Settlement Programme
Developments in the cash management landscape typically reflect larger economic trends and changes
in trading patterns, such as escalating intra-Asia trading volumes. A key development over the past two
years is the roll-out of the renminbi (RMB) offshore trade settlement programme by Chinese regulators.
The programme, announced in mid-2009, marks a crucial step by the Chinese government towards its
long-term goal of RMB globalisation. Some market observers also anticipate the RMB playing an ever
bigger role in Asia as intra-Asia trade continues to soar. On the whole, the scheme is one to closely
monitor now that China has overtaken Japan as the world’s second largest economy.
Under the scheme, eligible enterprises in China are now allowed to settle transactions with their
corresponding global enterprises in RMB, instead of having to convert into USD. The expansion of the
scheme’s scope from five test cities and 400 designated enterprises during the pilot stage is testament
to its success. Since its roll-out, demand has been strong and volumes have steadily grown. According
to the Hong Kong Monetary Authority (HKMA), the volume of RMB trade settlement in December 2009
reached RMB1.36bn, a significant increase from the cumulative amount of RMB115m in the first four
months of the scheme. 2
The scheme will benefit both buyers and sellers. For example, a corporate buying from China could
theoretically look forward to more transparent pricing and payment terms from their counterparts in
China due to reduced foreign exchange and administrative procedures. The programme will also facilitate
further growth into the Chinese market by expanding the pool of buyers and sellers that corporates can
work with. In addition, corporates will have access to a different funding currency. On the other end,
corporates selling to China are expected to benefit from potential future appreciation in the RMB, as well
as access to a larger potential pool of Chinese clients with limited access to foreign currencies.
2
As mentioned in the HKMA report” Briefing to the Legislative Council Panel on Financial Affairs” on 1 February 2010.
RMB Liberalisation Favours Hong Kong and Other Regional Markets
Hong Kong, being the largest RMB centre outside China, is taking the lead in cultivating RMB financial
products and services in Asia as demand continues to escalate. First, the HKMA has reduced the
complexity involved in opening RMB accounts, making the process very similar to that experienced
when opening regular Hong Kong dollar accounts. Second, mainland banks and authorities now bear
sole responsibility for verifying each transaction under the scheme, instead of Hong Kong banks. Third,
the HKMA now permits RMB-denominated loans and other financing, a measure which should gradually
increase RMB circulation in Hong Kong, as well as pave the way for expansion of the local RMBdenominated interbank market.
Apart from Hong Kong, China is also taking active steps to introduce the RMB to a number of countries
on a bilateral basis. It recently signed bilateral currency swap agreements with Korea, Singapore,
Malaysia, Belarus, Indonesia, Argentina and Iceland, as well as Hong Kong. This is expected to provide
more opportunities for intra-Asia and cross-regional activities involving the currency.
In the case of Singapore, international banks such as Deutsche Bank have increased their RMB offerings
as a growing number of corporates express interest in opening RMB accounts and issuing letters of
credit in RMB to settle trade in the currency.
Conclusion
Central to the success of a business is a robust treasury management strategy that enables it to
maximise operating and cost efficiencies. Today, advances in technology have empowered treasurers in
new ways, including approving transactions on the go, providing real-time access to account information
and automated reconciliation. With the growing importance of the region, and businesses pulling out all
the stops to reap maximum benefits from the recovery, it is vital that treasurers continue to evaluate their
existing strategy with their partner banks to stay ahead of the competition.
Brazilian Commodities
Fuel Boom in Ties with
China and Asia
Paulo Silva, Manager, Structured Trade Finance, and Eric Striegler Head of Trade & International, HSBC, Brazil
I
t is often said that a crisis should be seen as an opportunity (alongside the misinterpretation that the
Chinese character for “crisis” is a combination of those for “danger” and “opportunity”). While the
saying has long been echoed by motivational speakers and has become something of a cliché, reality
does sometimes support the idea.
During the recent global economic crisis, markets fell sharply, followed by a credit crunch, a lack of
liquidity, and recession. The bursting of the sub-prime bubble revealed the reality behind the economies
of developed countries – extremely leveraged corporates and individuals, loose financial regulations and
a banking system exposed to high-risk financial instruments, that were once top-rated.
While developed countries were pouring trillions of new money into the market in a battle to stimulate
their economies and keep their banks alive, emerging countries, with much less indebted economies,
high international reserves accumulated through the bonanza years and strong or booming local
consumer markets, honoured their label and truly emerged. Brazil and China are two of the most visible
examples, having shown strong resilience in the recession to place themselves, along with other
emerging economies, as the leading drivers of global economic activity.
Over the past 20 years, Brazil has carried out a quiet transformation by stabilising its economy,
consolidating fiscally responsible policies and democratic institutions, accumulating international reserves
and lifting some 20 million Brazilians from poverty and allowing another 32 million to move up into the A,
B and C socio-economic classes.1 China, in its turn, has made use of its centralised economy, powerful
state-owned enterprises and impressive international reserves to boost local consumption in addition
to setting a foreign exchange rate for the renminbi that works in favour of its products’ competitiveness
worldwide. Thus it has experienced a booming gross domestic product (GDP) for almost two decades
and, overtaking Japan, emerged this year as the world’s second largest economy.
1
Data from several studies for 2003-08, published by Marcelo Neri, Director of the Social Policies Centre of Fundação
Getúlio Vargas.
• Following the global financial crisis,
emerging economies are set to lead world
growth for some years ahead and further
stimulate South–South trade.
• Latin American trade with Asia has been
based on imports of manufactured goods
and exports of commodities. This pattern is
expected to continue, with the rise in Brazil–
China trade flows a visible example.
• Some 90% of Brazilian exports to China are
commodities, emphasising how the trade
relationship between the two countries has
developed, with Brazil being an agricultural
powerhouse and having vast mineral
resources and China needing basic raw
materials.
• Growing ties between Brazil and China,
including foreign direct investment in Brazil
and acquisition of stakes in existing Brazilian
corporates, are expected to further stimulate
the flow of commodities to China.
Yes, developed economies still account for most of the world’s GDP, but while trying to solve their own
problems they have left the field open for the much less troubled emerging economies, which have led
the world’s economic growth since early 2009. This reversal of roles is now an economic reality, with
the Organisation for Economic Co-operation and Development (OECD) forecasting that developing and
emerging countries are set to account for 60% of the world’s GDP by 20302.
The Latin America–Asia Trade Relationship
While developed countries used public debt to provide huge financial bailouts and stimulate their
economies, fiscally they deteriorated significantly, with soaring debt-to-GDP ratios and even more
alarming debt-to-revenue levels. Emerging nations with their resilient economies, however, took the
opportunity to enhance ties among themselves and prepare for further increased trade flows.
For example, China, which needs to feed its local industries and its domestic market with raw materials,
seems to have found the perfect match in Brazil, an agricultural powerhouse with lots of arable land, vast
mineral resources and on track to have grown 7.5%3 in 2010. In terms of the increase in bilateral trade
between the two countries in the last couple of years, they are set to be one of the world’s strongest
post-crisis trading partnerships.
Bilateral trade between Latin America and Asia, two important poles of emerging economies, is typified
by Latin American countries exporting mainly commodities and importing mostly manufactured goods.
According to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC),
Latin America and Asia had already increased their trade flows and deepened their economic ties before
the 2008 crisis.
In 2007 and 2008, worldwide trade flows expanded by some 15%, reaching USD32.6tr, but fell by 23%
during 2009, according to the World Trade Organization.4 Emerging economies did not go unscathed
during this period. Asia trade flows decreased by 18.9% and South and Central American flows dropped
by 24.5%. In addition, commercial integration between Latin America and Asia was hit and export
growth from the former to the latter slowed from mid-2008 when compared with the two previous
years, according to ECLAC.5
Importantly, fears that the 2008 crisis would lead to increased protectionism and hence to a long-lasting
reduction in trade were not realised and worldwide commerce has been able to bounce back, posting
important increases during 2010, mainly on the back of the performance of emerging economies. And
Asian demand for commodities has not contracted as much as its demand for manufactured goods,
providing support for commodity exporters such as Brazil.
2
3
4
5
“Economy: Developing Countries Set to Account for Nearly 60% of World GDP by 2030”, OECD, June 2010. See
OECD’s web site, www.oecd.org.
According to the International Monetary Fund’s World Economic Outlook, October 2010.
From the WTO’s online statistical database, stat.wto.org.
“Latin American and Asia-Pacific Trade and Investment Relations at a Time of International Financial Crisis”, Division of
International Trade and Integration, ECLAC, June 2010. See ECLAC’s web site, www.eclac.org.
Thus it is no surprise that the latest HSBC Trade Confidence Index6, published in September 2010,
shows that emerging markets continue to drive global trade confidence and that Brazil is one of the
most confident countries, with an index of 122, significantly above the global average of 116. In terms of
international trade, Latin America is the most confident region globally.
Brazilian Exports
In 2001, Brazilian exports7 reached USD55bn with commodities representing some 26% of the total.
Seven years later, the country’s exports had expanded to USD198bn with commodities accounting for
36.9%. Exports in 2009, affected by the crisis, dropped to USD152bn, but 2010 year-to-date figures
show a significant rebound and are already at USD89bn, or less than 2% below the same period in 2008,
with commodities’ contribution expanding again to 43.4% of total exports.
The Brazil-to-Asia flow of goods has long been dominated by commodities, which, in 2000, represented
42.4% of Brazilian exports to Asia. Since then, the figure has risen impressively, reaching 59.5% in 2007
and 71.5% so far in 2010.
In 2006, Asia was only the fourth major destination of Brazilian exports, accounting for 15.1% of total
exports, behind Latin America and the Caribbean (LAC), the European Union (EU) and the US. Only three
years later, Asia had become Brazil’s largest export destination and, as of June 2010, it accounts for
27.3% of Brazilian exports, an impressive 80.8% increase. Meanwhile, the US saw its share tumbling
from 18% in 2006 to the current 10.1% (see Figure 1).
Figure 1: Brazilian Exports by Country of Destination (%)
15.1 25.8 27.3
22.8 23.3 23.9
22.1 22.2 21.6
18.0 10.3 10.1
Asia
LAC
EU
US
2006
2009
June 2010
Source: SECEX-MDIC. Compilation: HSBC.
6
7
HSBC’s Trade Confidence Index survey covers a total of 17 markets – including key economies in the Asia-Pacific
region, the Middle East, Latin America, the US, Canada and Europe. In the survey, 5,120 trade-oriented small and midmarket enterprises were asked about their six-month outlook on: trade volume; buyer and supplier risks; the need for
trade finance; access to trade finance; and the impact of foreign exchange on their businesses. The results were used to
calculate an index ranging from 0 to 200, where 200 represents the highest confidence level, 0 represents the lowest and
100, neutral.
Statistics on Brazilian trade flow in this article are provided by the Foreign Trade Department of Brazil’s Ministry of
Development, Industry and Commerce (SECEX–MDIC). The 2010 year-to-date figures refer to the period from January to
June, unless otherwise indicated.
On the import side, in 2006 Asia was already Brazil’s major supplier, responsible for 25% of its imports,
followed by the EU, Latin America and the Caribbean, and the US. Since then, Brazilian imports from
Asia have risen to a current figure of 30.6% (see Figure 2).
Figure 2: Brazilian Imports by Country of Origin (%)
25.0 28.3 30.6
22.0 22.9 21.3
17.9 17.8 17.3
16.2 15.8 15.0
Asia
EU
LAC
US
2006
2009
June 2010
Source: SECEX-MDIC. Compilation: HSBC.
Growing Ties Between Brazil and China
In the last couple of years, Brazil–China ties have notably increased. From 2007 to 2009 bilateral trade
flow between the two countries increased by 58% to USD36.9bn (see Figure 3). Based on annualised
figures, trade flow is estimated to increase by 14.8% in 2010 to USD42.4bn (USD22.8bn in exports and
USD19.6bn in imports).
Moreover, in 2010, the growth rate of exports to China has outpaced the rate of Brazil’s total export
growth – as of July 2010, China received 54.9% of Brazilian exports to Asia, up from 50.2% in 2009 and
43.8% in 2008.
This means that China has now surpassed the US as Brazil’s top trade partner while Brazil is now China’s
10th largest trade partner.
Figure 3: Brazil–China Trade Flow (USD bn)
$19.6
$15.9
$20.0
$12.6
$1.2
$1.1
1999
$1.3
$1.9
2000
$1.6
$2.5
2001
$5.4
$8.0
$2.1
$3.7
$5.4
$6.8
$8.4
$10.7
$4.5
2002
2003
2004
2005
2006
$16.4
2007
$21
$22.8
Imports
2008
2009*
*Annualised figure based on 2009 performance up to July.
Exports
Imports to Brazil from China focus on electrical devices such as televisions and radio parts, regular and
liquid crystal display screen components, fixed and mobile telecom equipment, circuit boards and light
bulbs. But they are highly diversified, with no single category currently representing more than 4.9% of
total imports (compared with 3% in 2009). The top eight import categories represent only 15.1% of total
imports from China (14.2% in 2009).
Exports from Brazil to China are, however, highly concentrated, with the top seven categories being
commodities. Out of that, the top four – namely, soybean and soybean oil; iron ore; crude oil; and
eucalyptus pulp – comprised 80.1% of Brazilian exports to China in 2009 (and 87.8% as of July 2010).
The top two categories – soybeans/soybean oil and iron ore – represent 37.9% and 30.2% in 2010 (33.4%
and 34.7% in 2009). See Figures 5 and 6.
Figure 5: Brazil–China 2009
Exports Breakdown (%)
Figure 6: Brazil–China July 2010
Exports Breakdown (%)
Others
Crude oil
Soybean & soy oil
33.4%
Pulp
6.6%
Pulp
10.9%
4.2%
Soybean & soy oil
5.4%
37.9%
Crude oil
15.5%
Others
19.5%
Iron ore
Iron ore
34.7%
Sugar
Sugar
0.4%
1.3%
Source: Private Business Barometer, May 2009
30.2%
Source: Private Business Barometer, May 2009
During 2010, Brazil–China ties grew beyond trading in commodities, with soaring foreign direct investment
(FDI), bilateral loans and mergers and acquisitions. According to the Brazilian Central Bank, although
Chinese FDI in Brazil is still small (USD367m or 1.7% of the total), it has climbed by 760% compared with
2008.8 Chinese interests are also being established via bilateral loans (for example, the USD10bn China
Development Bank and Petrobras agreement) and through mergers and acquisitions (for example, Wuhan
Iron & Steel Group’s 21% stake in MMX Mineracao e Metalicos SA, a Brazilian mining company).9
What The Future Holds
The growing importance of Asia and China to Brazilian exports is, to a certain extent, changing the
structure of Brazil’s trade balance as the country’s exports are becoming geographically more
8
9
According to the “Foreign Sector, July 2010” press release by the Central Bank of Brazil. See www.bcb.gov.br.
For further information, see the following Bloomberg reports: “Petrobras Gets USD10bn China Loan, Sinopec Deal”, 19
February 2010; and “China’s Wuhan Steel to Pay USD400m for MMX Stake”, 30 November 2009.
concentrated on a single region and less diversified in terms of the goods exported, with increased
participation of iron ore and crude oil, exports of which strongly depend on global economic activity.
Yet the world still needs to eat, whatever the economic context, shielding Brazilian soft commodities
exports (except for those not related to food, e.g. pulp). Moreover, Brazil’s economy is fundamentally
insulated from global crises as they affect trade flows, as Brazilian exports currently represent less than
10% of its GDP (the five-year average is 11.9%).
On the macroeconomic front, while market participants do not expect any significant stressful events
in the short term, the world economy is far from having fully recovered and issues still exist that could
ultimately affect global demand and trade flows as well as exporters’ and importers’ performance and
refinancing risk.
With Asia and China’s strong interest in securing a flow of Brazilian commodities, Latin America, “having
weathered the financial crisis, now has an opportunity to join Asia in leading a global recovery”10. Brazil–
Asia and especially Brazil–China trade flows are expected to increase more than proportionally when
compared with overall trade flow figures.
Conclusion
In line with HSBC’s Trade Confidence Index survey, which suggests that momentum is clearly shifting to
emerging markets and presenting an opportunity for new trade corridors, Brazil in the foreseeable future
is likely to benefit from strengthened ties with China and Asia, and is likely to see enhanced demand
from that region, further boosting its commodities exports and promoting trade finance opportunities.
In the corporate world, companies willing to take part in and benefit from these new trade corridors
will need to establish stronger long-term partnerships with financial institutions that can be more than
a product provider and act as a solution provider worldwide. Financial institutions, besides being global,
will need to have a well-established presence in emerging markets and robust expertise in trade and
commodity finance as well as being able to provide effective foreign exchange hedging solutions.
10 From “Welcome to the Latin American Decade”, article by Luis Alberto Moreno, president of the Inter-American
Development Bank, published in the Financial Times on 6 July 2010.
China’s Changing
Priorities: Focus Shifts
to Domestic Trade
Christopher G Lewis, Head of Trade and Supply Chain, Greater China, HSBC, China
O
ne of the many outcomes of the global financial crisis has been a significant shift in Chinese trade
patterns. Historically, large Western buyers (such as retail chains) have to a great extent been able
to dictate pricing and terms to Chinese suppliers, who have been prepared to compete aggressively for
their business. Western consumers have obviously benefited from this: in many cases they are paying no
more in real terms for manufactured goods than they were 20 years ago. On the other hand, even during
the benign economic conditions prior to 2008, Chinese manufacturers dealing with these Western
customers struggled to maintain substantive gross margins.
However, as consumer confidence in many Western economies weakened dramatically in 2008 and
thereafter, demand for manufactured goods from Chinese suppliers saw a commensurate decline. (For
example, European Union imports from China fell by 13.4% in 2009.)1 Instead of further cutting their
margins in order to attract such Western business as was still available, some Chinese manufacturers
started to look for business elsewhere, particularly in domestic markets.
A further factor in the relative attractiveness of domestic markets is the lack of currency risk. The
extension of renminbi (RMB) trade settlement does, of course, open up the possibility of being paid
by overseas buyers in RMB, but this is typically a question of commercial leverage. If a foreign buyer
refuses to pay in RMB then the Chinese supplier still has to carry the hedging cost/risk.
Domestic Markets
The numbers certainly seem to support the sense of this strategy. China’s trade surplus of USD83.93bn
for the first seven months of 2010, while still substantial, actually represented a year-on-year fall of
21.2%2, suggesting that dependence upon exports to drive domestic growth was waning. This trend
1
2
For statistics on bilateral trade between the European Union and China see the Trade section of the European
Commission website, ec.europa.eu/trade/.
Statistics released by China’s General Administration of Customs on 10 August 2010.
• Traditionally, Western buyers – especially
large retailers – have negotiated from a
position of strength when dealing with their
Chinese suppliers.
• However, there are signs that this is
beginning to change, as manufacturers in
China become less willing to continually
cut margins for the benefit of Western
customers when more profitable domestic
business is increasingly available.
• With the shift away from export markets,
Chinese suppliers need suitable payment
and financing instruments to cater to
domestic trade.
• Trends suggest this need is being met
by supply chain financing, digitalisation of
drafts, improved trade documentation and
an increased use of receivables payment
solutions.
also has the endorsement of the Chinese government. Chong Quan, Deputy International Trade
Representative of China, speaking at a Beijing forum on China’s imports and exports in September 2010
predicted that China’s domestic market would exceed its total exports in 2010.
Figures from the 2010 edition of the Business Blue Book issued by the Chinese Academy of Social
Sciences3, also suggest that domestic consumption is rising strongly. From 2003 to 2008, China’s
retail sales increased from RMB5tr to RMB10tr, but the Blue Book predicts that the country will require
only two years to take retail sales from RMB10tr to RMB15tr.4 Recent economic data also offers some
support for this prediction, with retail sales growth in August 2010 picking up to 18.4% year on year
versus 17.9% in July.5
The visual evidence is also striking; even in inland cities thousands of miles from the coast, the wide
availability of consumer goods and new restaurants is apparent. In addition, established chains and
brands from Hong Kong are also moving into these cities in order to tap into the new domestic consumer
opportunities, as are global brands such as Louis Vuitton.
In view of the opportunities presented by this increasingly attractive domestic market, it is logical that
Chinese manufacturers would become less willing to continually cut their already low margins to satisfy
Western buyers – who in any case have recently been a shrinking market for their goods.
While this shift has been most prevalent in sectors such as garment manufacture, where Chinese
suppliers are dealing with US or European retail chains, it is also becoming apparent that higher value and
more sophisticated products are also becoming involved. An increasingly common approach is to use
technology transfers to drive domestic expertise, so that Chinese buyers are not dependent on imports
for these products. For example, the state-owned train builders China North Car and China South Car
have used this approach so that domestic demand for high speed trains can be satisfied by domestic
production.
Government Support
A further incentive for manufacturers to switch their focus to the domestic market is that increasing
domestic consumption is current government policy.6 A succession of speeches in early 2010 by senior
government figures, including President Hu Jintao, Premier Wen Jiabao, and Vice Premier Li Keqiang, all
referred to the need to transform the Chinese economy and the important role of domestic consumption
in moving China away from being a predominantly export-led economy.
Assorted measures implemented in the wake of the government’s initial 2009 USD586bn stimulus
package show that these words are already being put into action. These include:
A nationwide subsidy programme for the purchase of home appliances in rural locations;
A home appliance upgrade plan;
Subsidies on the purchase of small commercial vehicles (minivans and light trucks);
A reduction in purchase tax on small cars; and
Production subsidies to farmers on certain food crops, as well as subsidies for agricultural machinery
and farm construction.
3
4
5
6
“China’s Domestic Trade to Top USD2tr: Senior Official”, China Daily, 6 September 2010.
“China’s Retail Sales Over RMB15tr in 2010”, China Retail News, 31 May 2010. See www.chinaretailnews.com.
“China’s Major Economic Indicators in August”, report by the National Bureau of Statistics of China, 11 September 2010.
“Chinese Domestic Consumption Is the Way Forward”, Seeking Alpha, 1 March 2010. See www.seekingalpha.com.
Furthermore, the first phase of the stimulus package in 2009 was mostly directed towards infrastructure
projects.7 This proportion was reduced during 2010 with the emphasis instead being switched to
spending on areas such as education and healthcare that encourage domestic consumption. Combining
that with easier access to credit and lower domestic interest rates is expected to stimulate a fall of
around 5% in the household savings rate over the next three years. (Historically, consumer concerns
about rising education and medical care costs plus constrained credit access contribute approximately
30% to the high rate of savings.)
Finally, although not a formal stimulus package, the Chinese government also promotes domestic
spending through designating long (typically five or more consecutive days) public holidays, typically
twice a year, which allow workers more time to travel/spend.
Payments and Financing Keep Pace
In addition to the direct business-to-consumer space, China’s growing domestic consumption focus has
a knock on benefit for domestic business-to-business (B2B) activity. However, this obviously creates a
need for suitable payment and financing instruments and a number of trends suggest that this need is
being quickly fulfilled.
Supply Chain
One important example of this is in supply chain finance, where larger Chinese buyers have noted the
type of structures established by Western multinationals for their Chinese suppliers and are looking to
replicate them domestically.
A major concern for Western buyers is ensuring that supply chain finance does not affect their balance
sheet; for this reason, they seek solutions that are structured to ensure this. By contrast, Chinese buyers
are less likely to focus on the balance-sheet implication of their supply chain financing solution because
local auditors/regulators tend to be more flexible in their treatment of supply chain finance than their
counterparts in the West. As a result of this distinction, Chinese buyers (apart from some of the very
largest) are also generally more prepared to agree to an element of risk participation in their financing
solution.
Drafts
Another important development in the domestic B2B payment space relates to bank-accepted drafts
(BAD) and commercial accepted drafts (CAD). These are issued by banks and corporates respectively to
sellers in order to guarantee payment, but can only be issued in relation to a bona fide trade transaction.
Therefore, sellers in receipt of a BAD or CAD that they wish to discount (in order to draw cash earlier
than the stated draft maturity) must also submit proof of this trade transaction (e.g. an invoice or packing
list) to the discounting bank as proof, otherwise the draft will not be accepted.
A seller’s credit risk with BADs/CADs is on the issuer and therefore sellers receiving a CAD from a
corporate name for which they lack a risk appetite may seek to have it endorsed (guaranteed) by a
bank, whereupon it becomes a BAD and the seller’s credit risk is on the bank. While large sufficiently
highly rated corporates can directly issue their own CADs to suppliers, buyers with weaker credit will
typically ask a bank to issue drafts on their behalf so they are acceptable to their sellers. Formal tripartite
7
“HSBC Emerging Markets Insight 2010”, January 2010.
agreements that are established in advance among buyer, supplier and bank are also popular. When the
buyer issues a CAD the supplier can send it directly to the bank, certain in the knowledge that the bank
will discount it because there is an agreed facility already in place between the buyer and the bank.
Until recently, BADs and CADs have only existed in paper form. This has made fraud a major problem,
with numerous fake drafts in circulation – a situation that was exacerbated when drafts were
successively endorsed and recirculated. This was obviously undermining confidence in the market, so
recent electronic innovations in this area by the People’s Bank of China (PBOC) have been extremely
welcome.
In November 2009, the PBOC went live with a pilot scheme for the digitisation of BADs and CADs
whereby it also validated and guaranteed electronic BADs/CADs centrally as being genuine, which
immediately improved confidence in the market place. The scheme was trialled with just a few pilot
banks, but in June 2010, this was extended to a larger group of participating banks.
Documentation
Another important trend is developing around documentation for domestic and intra-Asia trade. In the
past, Chinese manufacturers selling to larger Western corporates often had access to some form of
supply chain finance arranged by their buyer. Manufacturers that are now switching their attention to
new domestic and intra-Asia customers, however, find that such supply chain finance is not usually
available, and their settlement cycle is thus extended. Therefore, any effort that can expedite payment
by minimising documentation errors and delivering any required paperwork faster is welcome. Another
factor is that Chinese banks are still relatively relaxed about providing credit to larger corporates, so for
them the emphasis is less on financing working capital and more on expediting settlement and reducing
days sales outstanding (DSO).
To this end, suppliers are keen to have access to solutions that allow them to process their
documentation more quickly. If a buyer requires a particular list of documents before issuing payment,
sellers are increasingly looking to their banks for a solution that will ensure that the buyer receives these
documents (without discrepancies) as swiftly as possible. Unfortunately, very few banks have the
resources and expertise to really deliver this service. Those that can will typically do a “proofing run”
with third parties such as shippers to check that their documentation is correct before they submit it.
These banks will also be aware of any potential documentary issues in various jurisdictions and are thus
able to forestall these problems before they arise.
Risk
Receivables purchase solutions are increasingly being used by Chinese suppliers to expedite settlement
and reduce their DSO. Some buyers will offer multi-bank solutions so that suppliers can access the
funding via several different banks. Suppliers will naturally tend to choose the bank with which they
already have a relationship, but they are also becoming far more selective as regards risk.
Under the vast majority of receivables purchase solutions (and other trade/supply chain financing
tools), the bank has recourse to the supplier in the event of buyer default, which obviously represents a
significant risk for the seller. This is particularly problematic where “default” is defined as the buyer not
making settlement within a predetermined period (rather than it actually committing an act of corporate
bankruptcy).
As a result, sellers are becoming far more discriminating about banks with which they are prepared
to enter receivables purchase agreements, trade and supply chain financing. Their understandable
preference is increasingly to deal with banks that are able to offer this financing on a non-recourse basis.
Conclusion
Weaker demand from Western buyers, government stimulus measures, organic growth in domestic
consumption and better potential margins on that consumption are clearly driving a change in business
strategy among Chinese manufacturers. Presented with a choice between ever-dwindling margins on
Western business and pushing at the open door of more profitable domestic demand (that is being
actively encouraged by the government) they are increasingly coming to the obvious conclusion.
In addition, domestic Chinese payment and financing infrastructure and solutions are keeping pace with
this shift. Larger corporates are looking to assist their domestic suppliers through supply chain financing
solutions, digitisation of the drafts market has boosted participants’ confidence/participation and some
banks are already offering solutions around documentation and receivables purchase that reduce DSO
and minimise counterparty risk.
While it is hard to predict exactly how far and fast this trend will run, it is clear that the Chinese
government’s emphasis on moving the country away from export dependence will have a substantive
effect. As a result, many economists predict that domestic consumption rates in China will increase,
which will in turn boost corporate margins and drive demand for greater functionality from banks’
domestic payment and financing solutions.
Ian Lewis, Partner, Mayer Brown JSM, Beijing, China
• The growth of the Chinese economy remains impressive. Many issues that were concerns
for overseas investors have been resolved, but it is still important to be up to date with policy
developments.
• The preferred choice of business vehicle has changed in recent years. The joint venture has
declined in popularity relative to wholly foreign-owned enterprises.
• Rising labour costs have increased the attractiveness of cities such as Chongqing and Chengdu.
However, changing the location of a business is not always straightforward.
• Intellectual property owners need to be aware of the protections that exist in China. Equally,
investors should establish what forms of arbitration they can access.
T
he year 2010 saw China once again registering impressive growth. The contrast with the economies of
the United States and Europe could not have been clearer. Concerns about debt and sluggish growth in
those markets were not shared by China, whose own efforts were focused on slowing down the economy
in order to ensure growth at a sustainable and healthy pace. Concern about the future among mainstream
populations in the western economies was very different to the mood of optimism and growing confidence
among the expanding Chinese middle class.
China continues to be the most exciting market in the world for business and foreign investors. The
uncertain prospects in developed economies have only served as a further draw to the rewards of a
booming China.
China has come a long way over the last 20 years and the issues that were of concern to investors even
five years ago are no longer necessarily relevant. China is a fast-changing market and investors need to
know that they are up to date with developments in policy and changes in the business environment.
The discussion that follows illustrates some of the major issues that should be considered when making
a new investment.
China has Changed but Government
Still has Influence on Business
Over the past years, China has introduced numerous reforms to protect private property rights and
has embraced the private sector. At the same time, regular and strong supervision is performed by the
government on all business sectors.
The National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOC)
jointly publish a catalogue of industries (“the Catalogue”) which lists some industries as being restricted
(meaning that investments in those industries will be subject to conditions or restrictions and will not
necessarily be approved) and, in some cases, prohibited entirely. Many industries are heavily regulated.
Investors who do not take appropriate advice when establishing a business in China can face disruption
to their business and/or high correction costs in the event that they are set up illegally.
The establishment of foreign-invested corporates is subject not only to the Catalogue but also to
numerous approvals, licences and consents. Unlike many jurisdictions, it is not possible to form a
company that can undertake multiple commercial activities. Rather it is necessary to apply for a specific
“business scope” to which, once granted, a company is expected to restrict itself. Any changes are
subject to approval by one or more authorities.
Expect Change
China has experienced rapid change in its legal framework
over the last decade. Investors should expect change and
be willing to adapt.
Many of the changes in law that have occurred in recent
years have been positive. Some have reflected China’s
efforts to modernise its legal system. Others have
reflected the maturing of the China market. However, regardless of the background issues, the changing
legal environment in China may sometimes radically alter an investor’s plans. For example, the Mainland
property sector attracted a great deal of investment between 2005 and 2007, but has been subject to
a number of restrictions and regulatory measures introduced by the government (with a view to cooling
the market) in the years since then.
Starting Small?
Important decisions often need to be made by investors when deciding how to enter the China market.
The basic choice of business vehicle is usually the joint venture or the wholly foreign-owned enterprise. It
is, however, common for some investors to form a representative office and seek to use such a base as
a “cut price” way of doing business. The fact that a representative office should be used only for liaison
and not business, combined with new rules that can result in taxes being imposed based on business
being deemed to have been conducted, makes this an increasingly inappropriate option, save where very
restricted activities are envisaged.
Same Again?
It is becoming increasingly unusual for investors to make a single investment. It is therefore important
to review investment arrangements. It should be noted also that the joint venture has declined in
popularity and that many Chinese corporates prefer to do business on their own (certainly fewer Chinese
corporates seek an investor purely to raise funds). Likewise, many foreign investors into China now prefer
the wholly foreign-owned enterprise rather than the joint-venture company.
Although many foreign investors entered China by forming a joint venture in the 1990s, this is not
necessarily an option that would be selected by all investors entering China in 2011. It is important for
an investor to consider whether to do a “repeat deal” when building on past investments or whether
to consider an alternative way of expanding business in China. Obviously a lot depends upon the
circumstances of each case, but there are a number of options, including the following:
Converting an existing joint venture into a wholly foreign-owned enterprise by buying out a jointventure partner;
Increasing the registered capital of an existing legal entity, expanding its business scope and
increasing the size of the initial operation;
Acquiring a domestic company and converting the same into a joint venture or a wholly foreignowned enterprise; and
Merging with a domestic company and creating a larger foreign-invested enterprise.
There are other variations that might be considered, including location. Major centres such as Beijing
and Shanghai attract the lion’s share of foreign investments. However, other cities are competing
with special regulations offering fast-track approvals in order to lure foreign investors. One example is
Chongqing, which has set up Chongqing New North Zone. This offers an accelerated approval process
for manufacturing companies.
Be Aware of Changing Cost Factors
China was once seen as a low-cost manufacturing centre to be used for export purposes. This is
increasingly not the case. Although labour costs remain low in certain cities, they have risen considerably
in Beijing, Shanghai and elsewhere. Given the increased salaries enjoyed by the Chinese population,
the domestic market is becoming more important – which is attracting yet more interest from foreign
investors.
Rising labour costs are making cities such as Chongqing, Chengdu, Wuhan and others more attractive
than might have been the case in the past. However, investors need to be aware that the costs of
reorganising a business can be considerable. A company wishing to move operations from one city
to another should be aware that the costs involved in dealing with labour issues in a new city can be
considerable. Severance payments are required by the Labour Contract Law and – where significant
numbers of workers in one city are to be made redundant – there are legal requirements for the
preparation of a Redundancy Plan. Cost and timetable issues need to be considered carefully.
Local Issues
In addition to checking the general law and the requirements of the appropriate governmental bodies
in charge of a particular industry, investors should be aware that very often there is local legislation
applicable to particular industries and that, although
investment in an industry might be generally permitted
within China, local regulations can add an additional layer
of complication.
Furthermore, local authorities in the more remote parts
of China may have their own policies. Contact with local
officials or preliminary reviews of local law and policy by
legal advisors is highly desirable.
Intellectual Property: Minimising the Risks
Many foreign investors are concerned about intellectual property (IP) issues. China is sometimes
criticised for not taking this issue seriously enough. However, many foreign investors fail to fully protect
themselves and some are unfamiliar with the protection that is already available.
Registered patents or trademarks owned by a foreign investor overseas are not necessarily protected
under Chinese IP laws and should also be registered in China. China has its own IP registration
system for entities wishing to protect inventions, technology and other intellectual property. The main
registrations that should be considered are as follows:
Registered Patents
There are three types of registered patents in China providing protection for various technologies at
different novelty levels, i.e. inventions, utility models and designs. Foreign patent owners are required to
engage a Chinese patent agency to file the application papers with the State Intellectual Property Office
(SIPO). Unregistered patents are either treated as “business secrets” (similar to “know-how”) or publicly
available knowledge.
Registered Trademarks
If a foreign trade name or mark is to be used in respect of products or services to be provided in China, it
is desirable that such names or marks and their appropriate Chinese translations be registered with the
Chinese Trademark Office (CTMO) by filing trademark applications.
Generally, only China-registered trademarks are entitled to protection pursuant to Chinese Trademark
Law and unregistered trademarks (including those registered in other countries) do not enjoy protection.
Third parties are free to use unregistered marks.
Copyright
Although copyright registration is not compulsory under Chinese Copyright Law, a copyright registration
certificate is useful when claiming copyright before the Chinese courts and other authorities in the
jurisdiction. The Chinese Copyright Protection Centre (CCPC) under the National Copyright Administration
of China (NCAC) is the governing authority for examining and approving copyright registration.
Understanding the Traditional Chinese Approach
It is important not only to understand how China is changing, but also how Chinese businesses have
changed. At one time, most of the major companies in China were state-owned, employing individuals
who were effectively in jobs for life. Given the past weaknesses of the legal framework, it was often
convenient for businesses to work through relationships rather than agreements based on documents.
Although things have changed, relationships are still seen as important and an investor is likely to come
across a variety of approaches to business and documentation among Chinese business partners. If
a foreign investor appreciates this background, they will be better able to understand their business
partner’s objectives and explain their own business culture and expectations in respect of contractual
obligations and management structures.
Disputes
Many foreign investors are used to dealing with disputes through the involvement of lawyers and the use
of the litigation process. The practice in China has been different for some time, with some companies
seeking a solution without court assistance. In recent years reform has been introduced, and things have
improved. Still, many foreign investors prefer to establish the right to use an arbitration centre offshore.
The Singapore and Hong Kong International Arbitration Centres are particularly popular.
It should be noted however that offshore arbitration is available where there is a “foreign element”. This
generally means that one of the parties is incorporated offshore or the contract will be performed in
part or in whole offshore. Where there is no foreign element, the parties are generally required to use a
Chinese arbitration centre subject to documentation governed by Chinese law. Generally, arbitration in
China through the China International Economic and Trade Arbitration Commission (CIETAC) is preferred
by most foreign investors.
Conclusion
China is a rewarding place to do business, but many challenges still remain. However, the complications
and difficulties can be greatly reduced through thorough preparation and the careful consideration of the
alternative courses of action available. The outlook for China remains positive. The development of the
domestic market will see new opportunities for foreign-invested as well as Chinese domestic companies.
China’s increasingly outward focus will also see Chinese corporates becoming more international, with
numerous opportunities for international cooperation likely to develop. The need to adapt to changing
conditions and the basic issues discussed above are likely to remain relevant.
Renminbi Liberalisation:
Timeline Compression?
Ben Chan, Senior Vice President, Strategy, Propositions & Channels, Commercial Banking, Asia Pacific, HSBC,
Hong Kong
T
he launch of the renminbi (RMB) pilot trade finance scheme in 2009 was a highly significant change
for what has formerly been regarded as a “closed” currency. The initial scheme made it clear that
the use of RMB in bona fide trade transactions was acceptable to the People’s Bank of China (PBoC) but
that other activities (such as speculation) were most definitely not. The pilot permitted trade transactions
between certain mainland Chinese cities and Hong Kong, Macau and countries of the Association of
Southeast Asian Nations (ASEAN) to be settled in RMB. While the initial pilot was regarded as relatively
modest in scope, there were expectations that it would in due course be extended to include other
countries.
A further announcement in February 2010 confirmed and perhaps slightly exceeded this expectation,
by effectively allowing Hong Kong to treat RMB just like any other foreign currency. The only important
caveat was that RMB transactions could not flow back without conditions onto the mainland from Hong
Kong.
Major Step Forward
The third major announcement regarding RMB liberalisation came in two phases: in June 2010 by the
PBoC and in July 2010 by the Hong Kong Monetary Authority. The first relating to trade settlement
extended the scope of the programme to cover any global location. In addition, the areas of mainland
China permitted to participate in the scheme were extended from a handful of cities to four municipal
cities and 16 provinces (which effectively cover the most economically significant parts of the country as
far as external trades are concerned).
The second phase of the announcement related to RMB in the context of wealth management in
Hong Kong:
Restrictions on personal accounts denominated in RMB were relaxed. Funds can now flow from
these directly to corporate accounts.
Insurance companies and non-bank financial institutions can now open RMB accounts in Hong Kong.
• The People’s Bank of China announcements
of June 2010 and that of the Hong Kong
Monetary Authority of July 2010 indicate a
significant acceleration in renminbi (RMB)
liberalisation.
• In addition to further expansion of the
RMB trade programme, additional
RMB-denominated investment and hedging
instruments are now available.
• The increase in the pace of RMB
liberalisation has had a commensurate
effect on the need for corporations to
accelerate their preparations for handling
RMB-denominated transactions.
• This applies equally to organisations with
either direct or indirect trading links with
China and has important implications for
corporate treasuries.
Renmibi Liberalisation: Timeline Compression?
Even if not related to cross-border trade settlement, any company can now purchase RMB in
Hong Kong.
The June/July 2010 announcements probably represent the biggest steps towards RMB liberalisation
to date. On the trade side, the radical expansion of both the permitted participating areas in China and
permitted global counterparty countries effectively make the RMB universally applicable as a trade
currency.
The steps relating to wealth management are similarly important in that they will increase the offshore
attractiveness of RMB, as there will now be wealth management products available in which to invest
any RMB that individuals or corporations receive. In time this is likely to prove a significant motivation for
individuals or corporations to use RMB as a store of value by accumulating the currency offshore.
Investment and Associated Instruments
While the announcements relating to offshore wealth management are undoubtedly encouraging, it will
take a little while before there is sufficient critical mass for core treasury-related products (such as RMB
liquidity funds or commercial paper) to emerge. However, there has already been some progress: RMB
structured deposits and certificates of deposit are already available, as well as RMB-denominated and
RMB-settled insurance policies.
At the long end of the yield curve, banks and corporates are already issuing RMB-denominated bonds
– an activity that is only likely to intensify. In addition, the first RMB fixed income fund (investing in
mainland China) has already been launched. As these trends continue, the offshore RMB environment
will become capable of supporting instruments such as liquidity funds and ultimately commercial paper.
Another major development has been that RMB deliverable (as opposed to non-deliverable) forwards are
now available for hedging. While this is in itself important, an even more significant corollary is that banks
are now able to propose new RMB-denominated products. If the regulator deems these acceptable,
then they can be launched.
However, the initiative likely to have the greatest effect is the “mini-QFII” scheme. This complements
the existing qualified foreign institutional investor (QFII) arrangements, whereby overseas institutions
are permitted to invest in mainland China in Shanghai and Shenzhen. While much of the media coverage
of the mini- QFII programme has focused on the implications for mainland securities markets, the
attractions from a treasury perspective are significant. The yield on RMB deposits will probably go up as
there will be more RMB fund deployment channels in Hong Kong.
Trade-Critical
While the mini-QFII has aroused considerable interest, it is unlikely to have a major effect on the mainland
RMB markets because of Hong Kong’s relatively small size, though it will undoubtedly have some influence
in accelerating the pace of RMB liberalisation. By contrast, RMB trade settlement is likely to have a far
greater effect in this respect as it effectively projects RMB as a tradable currency around the globe and
increases its overall attractiveness. In terms of priority, RMB trade settlement has been the primary driver
and the developments around RMB investment instruments are simply a logical extension of this.
Increasing the level of RMB trade settlement activity is also likely to remain a priority as a means of
raising RMB flows outside mainland China and thereby facilitating a reduction in the reliance on US
government debt currently held by China.
However, most of the activity to date around RMB liberalisation has been concerned with currentaccount rather than capital-account items. The RMB current account is already effectively fully open in
terms of currency convertibility. The wealth management product expansion mentioned above makes
offshore RMB more attractive to hold. The next step will be capital account convertibility. Once capitalaccount convertibility is in place, the RMB will have arrived as a truly international currency.
Nevertheless, this will probably be a gradual process, as witnessed by the retention of one particular
RMB restriction, namely the daily exchange limit of RMB20,000 for individuals. Raising or removing this
limit would obviously increase the rate of RMB circulation in and out of Hong Kong. However, by contrast
with its attitude to genuine trade transactions, when it comes to individuals holding or moving RMB for
capital investment the authorities have opted for a more conservative approach.
Start Now
The June/July 2010 announcements from the PBoC mark a clear acceleration in the pace of RMB
liberalisation which strongly suggests that “wait and see” is no longer a viable strategy for interested
parties. Corporate treasuries that have not already done so need to get a grasp of the implications of this
acceleration by conferring with their principal cash management banks – particularly where those banks
have strong RMB experience.
Here, a number of factors that require forward preparation come into play, with internal systems one of
the most prominent. If a corporation is likely to be handling RMB payments or receipts, then changes
to its enterprise resource planning, treasury management and/or accounting systems may be required,
which can easily take three to six months to complete. One complication already experienced by some
corporations in Hong Kong is that in some accounting systems RMB is hard-coded as a non-convertible
currency, which is evidently less and less the case. Rectifying this may involve considerable time and effort.
A further challenge is keeping up with the pace of RMB adoption on the part of some large buyers.
Organisations with significant sales operations in mainland China are understandably keen to use the
RMB revenues from these to settle onshore suppliers’ accounts and are therefore insisting that these
suppliers switch to billing in RMB. Furthermore, in certain cases they are setting extremely aggressive
timelines for this, which less prepared suppliers are struggling to meet.
While such activity is not yet commonplace, it is self evident that in the longer term the ability to pay
and receive in RMB will no longer be a matter of choice. An essential part of any tendering or trade
process involving mainland China will sooner or later include the need to be able to process RMB. In
the immediate term, profit-and-loss opportunities are already emerging where organisations with lower
foreign exchange hedging costs are finding that switching from billing in US dollars to billing in RMB can
generate an additional net margin even after currency conversions costs are taken into account.
As with any change in process, there is a learning curve to be mastered, which, in view of the rules that
must be complied with in relation to RMB settlement, is not insignificant. As a result, there is much to
be said for treasuries establishing and running trial programmes with small transactions and volumes as
soon as is practicable. This should allow any operational teething troubles to be addressed before volume
and transaction size are ramped up in full production.
One final yet crucial point that may be escaping some corporations is that RMB liberalisation is about
much more than just trade with mainland China, Hong Kong and Asia. The logical conclusion is that
the RMB will in due course supplant the US dollar as the trade currency used for many “neutral”
trade transactions (i.e. transactions where the US dollar is not the functional currency of either trade
counterparty). This is particularly true of transactions involving countries that already have strong
trading links with mainland China, such as many Asian countries and some of the larger Latin American
economies. Therefore, even corporations with no mainland China-related trade may find themselves
having to use RMB if they wish to remain competitive.
Bank Relationships
From a corporate treasury perspective, recent events indicate that (if not already underway) RMB
planning needs to be undertaken as soon as possible. The challenge for many treasuries will be in
sourcing the right information from their banks. The most suitable banks for supplying this are those with
both China knowledge and RMB business experience, in addition to strong regional and global focuses.
In view of the RMB’s probable broader role as the preferred currency for “neutral” trade, a further
complication lies in finding a bank able to provide comprehensive RMB services on the ground in key
global trade locations. At the very least, any bank providing RMB services should be able to cover the
majority of China’s global trade footprint.
A further consideration is how well bank RMB solutions are integrated with existing services. In view of
the need for a rapid RMB response, corporations will ideally be looking for RMB account facilities that are
tightly bound with their existing accounts and do not require a complete new set of account application
forms. The need for transparency also means that the ability to view and manage RMB balances
alongside other currency accounts via a single online banking log-in is prominent on the wish list of many
businesses.
Conclusion
RMB liberalisation is clearly gathering momentum and in the process is generating a variety of
opportunities and challenges. The key to turning the latter into the former lies in early preparation;
rather like Y2K and the introduction of the euro, the longer the delay, the greater the potential costs and
disruption.
As a result, this is one of those areas in which treasury has the opportunity to deliver a very tangible
bottom-line benefit to the corporation as a whole. Gathering information and outlining the road map is
therefore something best undertaken sooner rather than later.
Perspectives
Perspectives
Forming A New Partnership: Banks as Your Change Agent
Forming A New Partnership:
Banks as Your Change Agent
Marcus Treacher, Head of Client Experience, Global Payments and Cash Management, HSBC Bank plc, UK
• Companies are often hesitant about switching to a new banking partner because they are
concerned about the nature and magnitude of internal changes that will be required.
• Banks today have a key part to play in assisting corporate clients in managing these changes
efficiently across processes, people, technology and risk. To accomplish this and ensure a
successful transition, the bank has to work closely with the client as a partner.
• As part of this process, the bank must help the client to visualise the entire onboarding journey
by outlining the specific activities the client will need to undertake to successfully negotiate the
transition to the new bank.
• A collaborative approach provides for a more rewarding client onboarding experience, ensuring
a smooth transition to the new banking partner and highlighting the fact that the change
undertaken has been for the better.
C
hange is inevitable in today’s fast-paced commercial environment, but when corporations are
selecting a banking partner for all their cash management and treasury needs, the breadth and depth
of change involved can be extensive. Selecting the right bank is itself challenging enough, but that is still
only the first step in a series of organisational changes. In view of this, many companies are hesitant
even to take that first step of considering a new bank, as they are daunted by the potential costs and
disruption of the changes that will be involved.
Planning for Change
In the light of this, it is prudent to tabulate corporate objectives and their implications for treasury and
finance. It then becomes possible to weigh up whether switching banking partners is justified by the
potential benefits.
Even after a decision to switch banks has been made, making the necessary internal changes is usually
easier said than done. Changes ranging across people, processes and technology will probably be
required, so a high degree of engagement across both business units and finance functions will be
needed to maximise project buy-in. A further important point is how best to allocate adequate resources
to the project while still having sufficient capacity to perform day-to-day tasks effectively.
These considerations usually cause corporations much anxiety and, without a clear picture of what lies
ahead or the magnitude of change involved, may result in a reluctance to undertake change. To address
this, a bank needs to reassure corporations that while it is able to provide the right banking solutions,
it also is able to act as a change agent to assist with internal change preparation. The bank should be a
close working partner capable of advising corporations on the optimal way to communicate the benefits
of the change, as well as addressing any questions and concerns.
Perspectives
A bank that is prepared to step up to the plate as change agent will also be ready to lead all aspects of
the transition from the corporation’s previous service provider to themselves. This includes a thorough
examination of the whole implementation process, including the identification and pre-emption of any
potential areas of concern. The bank will also be able to draw on its implementation experience to
anticipate any issues that are likely to arise and the best way of dealing with them.
Initiation
After selecting a bank, the next step is initiation, which typically involves a considerable amount of
knowledge transfer. More specifically, a long term banking partner will be looking to obtain as much
information as possible about the corporation’s business model, needs and objectives. This is also
the perfect opportunity for the bank to share relevant experience of previous implementations with
corporate treasury to help obtain buy-in from all levels of the company. Ideally the bank will have already
accumulated considerable experience in dealing with corporations in similar lines of business and will
therefore already be aware of any industry-specific challenges likely to arise. This can be used to quickly
identify any room for improvement in existing processes and also provide an early indication of what will
need to be changed.
For example, at HSBC the segmentation of cash
management specialists based on industries delivers
in-depth segment experience. These professionals
can provide relevant consultation by sharing industry
knowledge, advising on best practice and anticipating
common challenges faced by similar industry clients
from a people, process and technology perspective. This
also ensures that the bank assembles the right team to
manage the project from the outset, thereby providing
additional support for initiating the change process.
The initiation stage is also where both bank and corporate
implementation teams will evaluate all aspects of the
project in depth, including business operations, readiness
of staff and compatibility of systems and technology.
Preparations to tackle identified challenges and concerns
in these areas can then be incorporated early on in the
project plan.
A critical factor for success in managing any project is the efficient sharing of information between
project teams. All information captured during the initiation stage should be readily accessible to all team
members for easy reference throughout the lifecycle of the project. A single, shared repository – such as
HSBC’s ClientSphere web-based project management portal – provides a convenient platform to house
such information for use as and when required.
Perspectives
The initiation stage is key to paving the way forward. When successfully undertaken, it can provide a
considerable degree of corporate comfort, as Kosuke Wada of NYK Line confirms. “The decision to
implement a single-bank solution was certainly met with some anxiety because we knew that changes
had to be made to our systems and our whole process had to be revamped,” he says. “However, having
HSBC on hand to share industry knowledge and best practice was an immense help because it gave us
confidence that we were working in partnership with an organisation that had travelled this road before and
one that truly understood our industry and business.”
Planning and Preparation
After the initiation stage has been successfully completed, the next step is to plan and prepare specific
activities prior to implementation. Traditionally, planning has consisted of banks preparing a project plan
which mostly comprises bank-centric tasks, but with little regard for the changes needed on the client
side. By contrast, HSBC takes a very different approach by developing a customised project plan that
clearly indicates the individual tasks for both the client and bank implementation teams. To ensure a
smooth transition, the plan also specifies milestones that will indicate the successful completion of
individual tasks. These milestones can relate to various activities, ranging from internal preparations to
the timeline for informing customers of the change in the corporation’s banking partner. In addition to
clearly specifying the activities required of both implementation teams, a further advantage of this type
of project plan is that the corporation can readily identify the benefits that accrue as changes are made
and major project milestones achieved.
Ultimately, jointly planned tasks are then incorporated into this type of customised project plan to ensure
a collaborative implementation process. The objective here is to develop a blueprint that not only itemises
the roles and tasks of each implementation team, but that can also be circulated within the corporation
to help secure internal buy-in. Such an approach not only enhances client satisfaction, but also helps to
foster the spirit of partnership/collaboration that is vital to a successful long term relationship.
A robust project plan also makes it easier for the
corporation to intelligently allocate resources to the
project to ensure its success. If there are major transition
activities to be carried out, the organisation can either
allocate more internal resources or decide to split the
required activities into smaller phases. In this regard,
banks need to be able to offer dynamic tools, such as
HSBC’s ClientSphere, that allow clients to simulate
project plans based on the solutions offered. This not
only allows the production of “on-demand” project plans,
but also allows clients to evaluate various plans before
settling on one that best fits their needs, as well as
reducing the overall turnaround time and increasing the
likelihood of project success.
For example, Heinz-Longfong Food recently worked with HSBC on a project to establish a cash pooling
structure across the company’s subsidiaries in Asia Pacific. Following the methodologies mentioned
above, the additional information and advice provided by the bank offered the company a structured
onboarding roadmap, as well as allowing it to identify barriers in migrating its business to the new
solution.
“Having a project plan that included anticipated issues and project activities helped us envisage how
best we could proactively manage the project,” says Mat Rao, Finance Executive, Project Co-ordinator
of Heinz-Longfong Food. “Thorough prior planning also helped to minimise the consumption of project
team resources by addressing some issues early, thereby giving us valuable guidance on how to
complete activities successfully at the first attempt.”
With a strong working partnership and effective planning in place, implementation can begin. While the
project plan is used as a base, HSBC supplements this with a transition toolkit, which covers process
maps and communication templates. The toolkit is customised according to client needs, with the
information ranging from simple to complex settlement account information, cut-off times and marketing
information, as well as to-do checklists needed to map vendor master data profiles during system
integration. This is not only essential for a successful transition but also provides a very streamlined and
structured approach to tackling change activities.
During this stage, it is important that project activities are actively tracked and are always visible and
transparent to all project stakeholders, which assists the rapid resolution of any issues that may arise.
Through regular meetings between both parties, potential slippages can be readily identified and
addressed to ensure that the project continues according to plan.
While most banks do this in some form or another (such as emails and conference calls), the most
effective approach is to make use of a dedicated project management tool (which few clients are likely
to have themselves). This not only allows all information relating to a project to be consolidated in a
single repository, but also allows that information to be sliced and diced for internal presentation and
communication as needed. For example, while the lead project managers may need to drill into the
minutiae themselves, they also need to be able to consolidate the available information so that other key
stakeholders can quickly grasp high level project progress.
HSBC’s ClientSphere delivers precisely this functionality, which was extensively used by BT Global
Services during its project to rationalise financial operations and bank relationships across Asia Pacific.
The value of ClientSphere for this purpose was confirmed by Catherine Yu, Regional Controller of BT
Global Services, who found ClientSphere’s status reports to be “a very useful tool” in facilitating the
company’s internal management reporting.
Review
The final stage of the process is as important as the first. During the review phase, the bank can
gauge the success of the corporate transition through feedback sessions. Traditionally, reviews were
held to close off a checklist and ensure all services had been correctly provided. Today, reviews are
Perspectives
Implementation
used to evaluate the entire process – i.e. if the changes from people, processes, technology and risk
perspectives have successfully created a stable working relationship with the corporation’s new banking
partner.
Perspectives
At this stage the new bank should also be able to provide
quantitative data to demonstrate how the completed
project has helped meet corporate objectives. This
includes analysis of trends based on the set objectives
(which assists in validating the original selection decision)
and can also be used to demonstrate project success to
stakeholders within the corporation. In effect, the bank should at this stage be able to assist in evaluating
corporate objectives, both tangible and intangible, against actual results.
Conclusion
Switching banking provider does not have to be an excruciating process. Any new banking partner has
(or should have) a vested interest in making the migration process as painless as possible. Its success
in actually delivering what it has committed to obviously depends upon the calibre of the tools and
personnel it can place at the corporation’s disposal and how well it deploys them. Key to that deployment
is the exchange and management of information. A combination of early and thorough information
exchange, expert advice and planning, and continuous dissemination of progress information is critical.
Without this, results will be sub-optimal. With it, the project will succeed and the ongoing relationship will
thrive. As Ajay Adikane, Regional Project Manager of Unilever remarks, “We were very sceptical when
we made the decision to switch banking partners and there was a huge amount of uncertainty among
all parties involved,” he says. “Much to our relief, HSBC provided us with top notch advice and worked
together with us throughout the implementation process. The changes we were most concerned
about were actually accomplished with relative ease and a successful migration delivered. Apart from
the bank migration in 2005, we underwent another migration onto industry standard ISO20022 format
in 2007. The expertise provided by HSBC in this field and the partnership approach taken by HSBC in
implementing the change made sure the change was delivered in record time without any impact to the
business.”
ClientSphere
ClientSphere is HSBC’s online solution delivery platform for Global Payments and Cash
Management (PCM) customers. In the past, customers traditionally managed their
implementation project via phone, email or meetings with their internal teams and banking
partner, which could be time consuming and required extensive internal resources.
As the first-in-market global platform for solution delivery, ClientSphere significantly reduces the
time and resources spent on communications, documentation and filing; and enables all parties
involved in the project – wherever they are located – to track and control the project in real time.
Perspectives
Instead, ClientSphere provides customers with a swift, seamless and easy-to-manage solution
for the delivery of cash management services. The platform enables corporate customers to
manage project activities and track current status via a secure banking website that is accessible
by both client and HSBC project teams. With just one click, users can have full visibility of their
project anytime, anywhere.
Banks and Treasuries:
10 Steps to a True
Partnership
• “Partnership” is a word often used to
describe the relationship between treasurers
and their bankers, but forging a collaborative
relationship with your banker requires
empathy and commitment on both sides.
• While many bank/treasury relationships are
harmonious, it is vital to keep in mind the basic
fundamentals that keep partnerships strong.
• This article outlines 10 simple ways to
enhance the working relationship.
Violet Yung, Vice President Regional Sales, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
“P
artnership” is a word often used to describe the relationship between treasurers and their
bankers, but forging a collaborative relationship with your banker requires empathy and
commitment on both sides. While many bank/treasury relationships are harmonious, it is vital to keep in
mind the basic fundamentals that keep our partnerships strong. As a former treasurer who now works
for HSBC, Violet Yung has an invaluable perspective on the bank/treasury relationship and here outlines
ten simple ways to enhance the working relationship.
Bankers, Put Yourself in the Treasurer’s Shoes
Listen
It may seem an obvious course of action, but any bank looking to build a strong working relationship with
a treasury client should listen closely to what the client actually wants and act accordingly. Nevertheless,
any banker with his/her client’s best interests at heart will want to share alternatives that might be to the
client’s benefit. However, the key here is to engage with the client informally at the earliest opportunity
to discuss the matter – don’t leave it until a formal competitive presentation.
In a previous treasury role my team and I issued an invitation to a panel of banks to submit proposals for
an off-balance sheet supplier financing scheme. Most of the banks, on the presentation day, duly put
forward off-balance sheet proposals, but one tried to convince us of the merits of an on-balance sheet
scheme. While this bank may have genuinely believed this a better solution for our needs, it unfortunately
gave the impression that in comparison to its peers it was not listening. If by contrast it had approached us
in advance to discuss our off-balance sheet requirement, it would not only have appeared to be listening
to our needs and acting proactively, but would also have gained a better insight into our treasury thinking.
Focus on Needs-Based Solutions, not Products
Proposing a bank product should always be undertaken in the context of specific client need, and
be entirely relevant/tailored to that need. Take care to present a solution that demonstrates your
understanding of the client, rather than a product that shows impressive cost savings based upon a
generic set of circumstances.
There is a major opportunity here for the banker who takes time to thoroughly assess the individual
client’s needs. A conversation that begins with a banker asking about a client’s operations and
discovering areas of potential improvement through understanding is one that is likely to enhance that
banker’s status as a trusted advisor.
A further advantage of this approach is that it also increases the chances of working together with a client to
formulate new solutions. For large corporations that need customised services, banks have initiated projects
which may then be adaptable to a wider market. If the treasury has a reasonable degree of certainty that the
product will address a specific corporate need, it may be prepared to await its launch rather than taking a
competing bank’s product in the interim that is less suitable.
Know Your Client
Corporate sales teams will typically undertake considerable research on customer prospects before an
initial meeting. They will have examined the prospect’s annual report and accounts, scanned relevant
news items and will have a fairly clear picture of of its business model in advance.
Banks that undertake Know Your Customer (KYC) checks before a sales call are demonstrating commitment
to the relationship. Furthermore, they are more likely to find the treasurer willing to help them expand that
knowledge so that they are in a position to further enhance the relationship by suggesting solutions that are
an optimal fit with specific corporate requirements.
Provide User-Friendly Information
Treasuries are obviously heavily dependent on the quality of the transaction and statement data their
banks provide for the efficiency of their financial management and forecasting. The key points here
are timeliness, but also usability. Banks that appreciate that the earlier accurate data is delivered the
more valuable it is are demonstrating they are on the treasury wavelength, where data timeliness (such
as knowledge of real-time cash balances) can be translated into bottom line advantage. By contrast,
delivering data either in a format convenient to the bank (rather than the client) or in a large amorphous
mass that requires hours of diligent data mining by treasury before any worthwhile information can be
derived is unhelpful.
Trust is Paramount
The absolute bedrock of any treasury/bank relationship is trust. A bank must not only listen to a client’s
needs but must avoid taking advantage of its relationship of trust. Fortunately most transaction banks are
well aware of the importance of always acting with the utmost probity in relation to their clients’ interests.
For example, banks enter into supply chain financing arrangements at pricing predicated upon certain
volume levels. Should these volume levels fail to materialise, such that the bank is operating the facility
at a loss, it has to act. The correct course of action is of course to raise the matter openly with the anchor
credit and try to resolve it amicably by negotiation. Regrettably, and particularly in situations where they
are the sole provider of this supply chain finance for a specific country, a very few banks may use other
methods. For example, in order to boost their margins, they may apply pressure to suppliers to purchase
additional products as a condition of receiving finance. This is obviously unacceptable and jeopardises
the relationship of trust with the anchor credit by potentially damaging its reputation with its suppliers.
However, as mentioned earlier, this sort of behaviour is fortunately very infrequent, as most banks realise
that not only is trust the foundation for a fruitful treasury relationship, transparently demonstrating that
trust in respect of clients’ interests is essential.
Perspectives
As a result, corporate treasuries understandably expect their banks to adopt a similar approach. While
treasury might expect to give the bank additional insight, it would expect the bank to have done the
fundamental background research as a starting point for more detailed questions.
Banker Empathy
While it is easy to put the onus on banks when it comes to the treasury/bank relationship, treasurers
have their part to play as well. The treasurer who addresses the following five points is well on the way
to developing a solid rapport with their bank.
Be Realistic on Timelines
Perspectives
While treasuries expect technology to work perfectly, they are sometimes reluctant to devote the time to
ensure this actually happens. A classic example is testing new technology prior to going live, where there
is often a tendency to keep staffing lean because the treasury understandably does not wish to allocate
scarce experienced personnel for a prolonged period to monitor a new piece of technology running in
parallel with its predecessor production system.
Committing to a testing period of at least a month that also incorporates a month-end (or ideally quarterend) is essential to iron out any glitches before they arise in a production environment and cause
disruption. Trying to squeeze this into a week mid-month due to limited resources may be expedient,
but if doing so remember that it is hardly reasonable to blame your banking partner for any subsequent
issues. In short, be realistic about timelines – especially those relating to testing.
Resource Commitment Should Equal Resource Delivery
If treasuries make a commitment to supply in-house resources to a project implementation, they need
to be prepared to stay the course. In practice, because experienced treasury personnel are scarce, it can
be tempting to adjust resource levels soon after a project starts. This is hardly ideal for a banking partner
that will have made a commitment to deadlines on the basis of a specific level of client resource.
Furthermore, any resources remaining after such an adjustment could be relatively junior; thus instead
of working with managers, the bank team often finds itself working with assistants. Without access to
senior personnel with strong knowledge of and access to corporate information, your banking partner
may find themselves working blind.
This is clearly counterproductive; the bank will obviously struggle to deliver to the original project
schedule. By contrast, the treasury that promises and actually delivers the necessary resources to an
implementation is not only demonstrating project commitment, but also relationship commitment. As a
result, it will benefit immediately and in the long term.
Your Credit is Your Credit
Treasurers are understandably highly focused on what should be delivered as a benefit to their company.
As a result, they can sometimes be less than willing to accept explanations as to why a particular benefit
is not actually deliverable.
For example, a company’s credit rating obviously affects its access to or pricing of certain instruments,
which can cause difficulties with certain hedging tools, such as long-dated (e.g. 10 years or more) crosscurrency swaps. The long-term counterparty credit risks associated with this sort of product mean that
the corporation’s relationship manager will need to apply for credit internally for these. Problems arise
where the corporation’s financials are simply not robust enough to cover the associated counterparty
risks from the bank’s perspective.
Rather than trying to portray this as some sort of fault on the bank’s part, a pragmatic treasurer will
simply accept the realities of the situation and enquire about possible alternative solutions, such as
shorter dated back-to-back swaps.
Avoid Conflicts of Interest
In many corporations, any changes to banking facilities (such as increasing or decreasing overdraft limits)
can only be managed and authorised by headquarters treasury. However, situations sometimes arise where
a local or regional finance/treasury function may seek an alternative approach. They may, for example,
approach their bank and request a temporary increase in overdraft limit to cover a missed cash flow target.
Making every effort to avoid creating this sort of conflict of interest for the bank is effort well expended.
Not only does it place less stress on the working relationship, it also allows the bank to focus on
operating in the client’s best interests at all levels.
Trust is a Two-Way Street
As mentioned earlier, trust is the bedrock of any treasury/bank relationship and this applies to both bank
and treasury behaviour. One area where treasuries need to be particularly careful in this respect is when
seeking reduced pricing or other concessions from a bank in return for a promise of new business at a
later date. Obviously, unexpected circumstances (such as unforeseen budget cuts) can arise, but it is
vital that, when possible, promises made in good faith be delivered upon. This fosters a feeling of trust
and mutual obligation.
If it is not, trust is undermined – but so also is the credibility of the bank relationship manager (RM)
within the bank. In order to fulfil the initial favour the treasurer requests, the RM may have to make a
case internally for doing so – and part of that case will include promised future business. If that business
subsequently fails to materialise, the RM’s position is weakened within the bank and he/she will
therefore struggle to gain approval on any further requests for the client.
Conclusion
One of the surest ways of developing a robust bank/treasury relationship is for both parties to try to
empathise with the other’s position. For example, treasurers need to try to understand the profit and
loss implications of their actions for their bankers, while bankers need to understand treasurers’ key
performance indicators.
In some of the closest and most productive bank/treasury relationships, this behaviour is the norm
and each side has an intimate understanding of the other’s business model and motivation. At an
individual level there is also an awareness that anything (as long as it is not also prejudicial to one’s own
organisation) that makes one’s counterparty look good within their own organisation in the long term
usually redounds to one’s own benefit.
Perspectives
This puts the bankers involved in a rather awkward position. On the one hand they would like to oblige
the local personnel with whom they deal on a day-to-day basis. On the other, they have an overall duty of
care to follow the company’s mandate in all circumstances.
Streamlining Standards and
Processes Across a Large Organisation
Catherine Yu, Asia Pacific Regional Controller, British Telecom Global Services; Bonnie YK Chiu, Senior Vice
President, Regional Sales, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong and Kay
Huang, Senior Vice President, Client Implementation, Global Payments and Cash Management, Asia Pacific, HSBC,
Hong Kong
• BT’s Asia Pacific business has rapidly established itself as an important supplier of communication
services in the region.
• Expansion through mergers and acquisitions meant different businesses used different
processes, different banking platforms and non-standard reporting practices.
• It became clear that unified financial standards and systems needed to be applied across the
whole region.
• As the measures were implemented, quantifiable results could be seen with a significant
increase in working capital throughout Asia Pacific.
T
he Asia Pacific region, with many of the world’s most dynamic economies, is an exciting option
for multinationals looking for growth opportunities. It is often the case that growth can be so
quick that it is hard for a corporate’s back-office infrastructure to keep up. This is especially true for the
finance departments of corporates that expand inorganically, since it creates a situation where cash
management practices vary across entities. In cases like this, the goal is to standardise processes and
streamline systems.
In this article, a closer look is taken at the experience of BT Global Services (BTGS), a division of the UK’s
leading telecommunications company BT Group, which is currently undertaking such a project. BT Group
is a supplier of communication and IT services to business and government, with a client base that
includes many of the world’s largest companies.
BT’s Asia Pacific business has rapidly established itself as an important supplier of communication
services in the region. It attained this position by following a strategy of inorganic growth: through
a burst of mergers and acquisitions. The total number of BTGS legal entities in Asia Pacific stood at
more than 70 in 2009. The most notable acquisition was Frontline Technologies, one of the region’s
largest end-to-end IT service providers. This deal alone, completed in 2008, gave BTGS an additional
5,000 professionals in 10 key Asian markets.
Catherine Yu, Regional Controller for BT Global Services, talks about her experience with managing
this project with the aim of optimising operational and cash management efficiency to improve the
company’s working capital.
We were starting to feel the impact of the expansion of
BTGS in Asia Pacific as the company has a very aggressive
plan to grow the business in the region. However, there
were so many legal entities using different processes,
different enterprise resource planning systems, different
banking platforms and non-standard reporting practices
that it became difficult to maintain visibility over financial
information. To ensure that the company had steady cash
flow to develop the business in the region, our goals not
only focused on profit generation but also the management of working capital. It became clear that we
needed to implement unified financial standards and systems across the whole region.
Working capital management affects our business in two important ways:
It allows the company to transform profits into cash more quickly, which in turn can be used to fund
other initiatives.
It provides senior management with improved data on company finances and enables them to make
timely decisions.
We therefore needed to implement a cash management information system to achieve maximum
efficiency. Progress was measured by quantifying improvements in inventory, prepayment, accrued
revenue, receivables, payables, accrual and deferred revenue. A typical key performance indicator – such
as days sales outstanding on accounts receivable, a measurement of the average collection period for
receivables – was applied to track the effectiveness of debt collection and credit management.
In a company with many different interested parties, it can be hard for this message to take full effect.
Although having a steady supply of cash in the bank is a constant concern for a treasurer, it might not
mean the same for employees in other roles, especially for staff whose performance is measured on
the basis of their ability to increase profits or bring in revenue. We found that the existence of a uniform
performance indicator helped encourage employees to work together towards a shared goal.
Setting Standards
To put in place a standardised process across all entities, we carried out a series of inter-related projects
that shared the aim of unifying diverse practices into standard procedures, which included:
Business process outsourcing (BPO): Day-to-day transaction work, such as accounting transactions
and payroll processing, were outsourced to our BPO partner. Before the work was migrated, we first
implemented a uniform approach for these routine transactions so that the outsourcing process itself
could be streamlined across the region.
Bank rationalisation: An integral part of the infrastructure improvement was transferring our
numerous bank accounts into one bank for the region. All regional entities migrated their accounts to
Perspectives
The Challenge
Perspectives
HSBC as our selected regional partner. The ultimate objectives were to:
• optimise liquidity management to minimise the amount of cash in Asia and reduce unnecessary
funding;
• automate processes and improve efficiencies by improved cash-flow forecasting, better control of
payments and the speeding up of collections;
• migrate from manual to electronic payments; and
• achieve complete visibility on all bank accounts.
HSBC conducted thorough in-country reviews that provided valuable recommendations to our working
capital and liquidity management processes. The advantage of consolidating accounts together into
one bank was apparent – the enhanced visibility over our cash in the region would be significant. This
visibility, delivered via a single online banking platform accessible anytime and anywhere, would be a
vast improvement on our previous method of manual consolidation and calculation, thereby helping us to
achieve the aim of reducing the amount of cash sitting in Asia.
Shared service centre (SSC): While transactional tasks were outsourced, work related to reporting,
review and analysis were all kept in-house. One option was to have these tasks conducted
independently in each entity, but this has the drawback that several operations are duplicated in the
region. By setting up an SSC, we could maximise efficiency by eliminating duplicated operations
and ensure a uniform standard of work. Our SSC staff would be dedicated to looking after 70 bank
accounts in the region and see the cash position of any of the group’s entities.
Global finance platform (GFP): To underpin our project, we wanted a unified internal financial platform
that would be used not just by us, but ultimately by BT Group worldwide. This system would have a
data hub to access information from any of the group entities. Bringing all of this data together would
provide a powerful tool for staff throughout the company – for example, the chief financial officer in
London would be able to access financial information on the business in Asia Pacific.
The GFP would help implement process improvement by gathering a broad range of business data
from procure to pay, order to cash, cash management, accounting to reporting, and from management
accounts to statutory accounts. The value in having such a system is in analysing the links between data
points – such as providing a bridge between the budget and balance sheet.
Preparing for the Change
First, not only was it necessary to have senior
management support, but staff at every level needed to
appreciate the benefits of improving financial processes.
For colleagues in front-office positions, our aim was to
help them understand that the initiative was more than
just finance-related but could actually help increase
revenue.
We achieved this by reviewing the business processes
country by country in Asia Pacific. We also engaged external parties when appropriate – for example, in
the bank rationalisation project and the GFP roll-out we worked closely with HSBC who, after helping to
identify the areas of change in account structures, accounts payable and accounts receivable processes
and liquidity management, proposed custom solutions for our local offices to enable us to manage our
idle funds across the region.
It was important to keep a strong line of communication open with staff at all levels of the organisation.
Junior members of the finance department might have interpreted the new system as a threat to their
job security. It was therefore crucial to reinforce the message that the outsourcing and automation of
transaction processing would not put their jobs at risk but, rather, allow them to allocate time to other
value-added tasks.
The final step was to put together the project timeline. Since these initiatives were interrelated, the
blueprint for their implementation was not a static process but a dynamic one that constantly assessed
the risks and business advantages of every stage. Throughout the undertaking, we held monthly
meetings with the regional chief financial officer to ensure that each step made was the right one.
Putting the Plan into Action
The next challenge was how to effectively monitor the integration of the finances of these different
entities in Asia Pacific while keeping senior management teams in the UK and the US informed of our
progress.
For some of the projects, we had our own project management tools to track progress. For the bank
rationalisation project, we benefited from HSBC’s project management expertise. HSBC also assisted
in following through with implementation tasks and coordinating local representatives of HSBC and BT
whose experience greatly contributed to the completion of project milestones, especially those relating
to documentation and account opening. The project team also provided valuable insights into industry
practice or country-specific requirements across the region.
All of HSBC’s efforts were supported by an online platform called ClientSphere that provides a single hub
of information and communication from which all parties, regardless of location, can access information
on project status and documentation. As each task was completed, ClientSphere was updated in real
time, an ideal way for our team to stay on track, for senior management overseas to monitor progress
and to reduce the time spent on status updates.
Louisa Chan, HSBC Senior Vice President, Client Management, says the use of ClientSphere, helped to
bring clarity to management of the project by creating end-to-end workflow automation. “The resulting
collaboration hastened the project’s completion, allowing the organisation to enjoy the benefits of the
new system sooner.”
Normally, BTGS would adopt a “big-bang” approach when implementing new systems, where the
changeover between systems occurs all at once – in contrast to a more gradual phased approach. With
the Asia Pacific roll-out, however, the transition could not have been big-bang as there were too many
entities and the market landscape was too diverse. Instead, we adopted a customised approach for
each entity – applying slightly different methods that took into account the size of the entities as well as
Perspectives
The next step was to establish a project team. We discovered that it was more effective to assemble a
team that consisted of representation from a variety of areas inside and outside the business to foster
new ideas and fresh ways of thinking. Our transition management working group consisted of members
from finance, IT and human resources along with BPO partners and HSBC. Everyone had a role to play,
from the human resources professionals, who were there to manage any staffing changes that arose
from automating processes, to the IT and finance partners who brought their specific perspectives and
knowledge to the project.
local factors such as different tax regimes. For example,
newly acquired entities where integration of internal
processes was still in transition and banking activities
were still routed through local banks would first undergo a
phased approach to rationalise accounts to HSBC for easy
visibility. Afterwards, migration to the GFP and automation
of accounts payable and accounts receivable processes
would follow. A big-bang approach was adopted for
entities with similar business processes and IT infrastructure where bringing staff up to speed was a
more straightforward process based on past experience.
Perspectives
Conclusion
Over 12 months, our team took on an ambitious project to improve our cash management processes
by streamlining operations and implementing new technology. Although the project is still ongoing,
our experience has revealed that communication is key, but a balance must be maintained in order to
avoid over-communicating. Our aim was to maintain a consistent message to all staff involved about
the purpose of our project and the anticipated benefits. However, we made sure to keep the message
realistic, timely and relevant. We also took advantage of the latest technology for our internal project
updates, which was a particular challenge given the geographic spread of our teams as well as senior
management.
As these measures are gradually implemented, we have noticed quantifiable results. By mid-2010, we
had increased the working capital of our Asia Pacific operations by USD69.5m, which meant we could
reduce our need for funding. And with the cost of borrowing significantly more expensive than it was
before the financial crisis, this is no small achievement.
About BT
BT is one of the world’s leading providers of communications solutions and services, operating
in more than 170 countries. Its principal activities include the provision of networked IT services
globally; local, national and international telecommunications services to our customers for use
at home, at work and on the move; broadband and internet products and services and converged
fixed/mobile products and services. BT consists principally of four lines of business: BT Global
Services, Openreach, BT Retail and BT Wholesale.
British Telecommunications plc (BT) is a wholly-owned subsidiary of BT Group plc and
encompasses virtually all businesses and assets of the BT Group. BT Group plc is listed on stock
exchanges in London and New York.
For more information, visit www.bt.com/aboutbt
About BT in Asia Pacific
BT’s presence in Asia Pacific dates back to 1985. The company currently employs around
5,000 specialists delivering services in 18 countries, with an additional 25,000 people indirectly
employed by BT in Asia Pacific. Core service offerings in the region include convergence
solutions, customer relationship management (CRM), conferencing, outsourcing, security, IT
transformation and mobility.
BT has announced an investment programme for its Asia Pacific operations, covering additional
resourcing, new infrastructure and an expanded portfolio of services.
As part of this plan, BT is in the process of hiring around 300 new positions across Asia. This
will ensure that key portfolio and services enjoyed by BT’s customers around the world can be
offered and fully supported in Asia Pacific. New staff will be employed across the region in the
key customer markets of Australia, China, Hong Kong, India, Japan and Singapore. BT is also
establishing a bid response centre in Singapore to enhance its capabilities to pursue large regional
managed services deals, an area where we lead the market today in many parts of the world.
In Asia BT maintains regional 24/7 service centres, with a customer management centre in Pune,
India and customer service help desks in Beijing, Singapore, Sydney and Tokyo. There is also a
technology and service centre in Dalian, China.
Other centres of excellence include a research centre in Malaysia, a research centre in China, a
global operations centre in Gurgaon, India, and an India-UK advanced technology centre with 22
industrial and academic partners.
Perspectives
In the year ended 31 March 2010, BT Group’s revenue was GBP20,911m.
Foundations for
Liquidity Management
• One of the fundamental building blocks
in improving liquidity management is
centralised control of bank accounts.
• Some corporates opt to put this in place at
the same time as establishing new liquidity
structures, while others prefer to undertake
this separately.
• Smith & Nephew took the latter route with
its Asian bank accounts and is already
reaping immediate benefits – as well as
streamlining the implementation of any
future liquidity structure.
Jonathan Logan, Assistant Group Treasurer, Smith & Nephew
S
mith & Nephew has operations in nine Asian markets: Hong Kong, Taiwan, Malaysia, Singapore,
Thailand, Dubai, China, India and Korea.
Although the majority of these operations are currently relatively small in the context of the company as
a whole, they anticipate significant growth in health spending in these markets. As healthcare systems
in these countries evolve, this is expected to drive increasing demand for the high end medical products
that Smith & Nephew provides.
Motivation
Originally, these Asian business operations were served by a mix of 15 local and three international
banks across the nine countries. Particularly in the wake of the banking crisis, this disparate arrangement
increased costs, as no one bank had sufficient company business to incentivise aggressive transaction
pricing. As a result, the company’s treasury took the view that consolidating banking across the region
with a single core provider would drive economies of scale in bank transaction pricing. A related
consideration was that the majority of the company’s Asian business units required funding and a single
banking provider would be more inclined to provide this if it was also in receipt of the bulk of Smith &
Nephew’s transaction banking business.
Two other important considerations relating to the consolidation of the company’s Asian banking
relationships were visibility and control. Previously, the only visibility central treasury in London had
on the Asian businesses’ cash was a month-end report from each company giving the total balance,
supported by an Excel spreadsheet with a breakdown of the details of which bank(s) individual balances
were held at. This rather manual process was both labour-intensive and ran the risk of keying errors.
As regards control, relationships with transaction banks in Asia were previously managed at a local
entity level with local signatories. Treasury at Smith & Nephew is centralised but cash management
typically decentralised. Policies are set centrally but local entities manage their own cash within these set
parameters. Previously, local entity finance directors would have autonomy over choice of bank, subject
to central treasury approval and confirmation. The local finance director would then open the necessary
accounts, establish the relevant systems and have responsibility for setting up the appropriate controls.
Wherever possible, central treasury would encourage local finance directors to open accounts with
international banks, but despite this it was generally felt that the number of bank relationships in Asia
was proliferating beyond the level really required.
Selection and Implementation
In early 2009, Smith & Nephew’s treasury started to consider the possible candidates for the role of
regional banking provider for its Asian businesses. The company already had relationships with HSBC in
some of the countries requiring coverage, but the main motivation for choosing HSBC was that it was
seen as the only bank that was able to offer a sufficient range of banking services in all the required
locations to make it viable as a regional provider.
The implementation started in January 2009 and was completed on schedule by September of that
year. The roll-out took place in two phases: the more demanding countries with significant funding
requirements were undertaken first, while those with lower/no funding requirements (or that already
used HSBCnet) were left until the second phase.
The majority of countries involved had some degree of need for local funding. Combining this with the
number of new bank accounts being opened resulted in a considerable amount of documentation and
ID requirements in circulation. In view of the small size of certain businesses, some guarantees and
letters of comfort were needed. The need for everything to go through the bank’s local country credit
committees to be approved could have caused appreciable delay. However, HSBC’s central London
team and its regional relationship team in Hong Kong were helpful in streamlining the process by
standardising the documentation around guarantees and letters of comfort wherever possible.
Operation
The implementation was completed smoothly and HSBC is now the primary transaction bank for
Smith & Nephew’s Asian businesses. Some local banks were retained in China and Thailand to address
the need for local bank accounts for tax/payroll reasons, otherwise all banking transactions are now
conducted via HSBC. However, where an account is still held with a local bank, it is only funded for the
specific tax/payroll purpose intended. Any funding provided to the business unit by central treasury is
always remitted to the entity’s local HSBC account. By the same token, any surplus cash arising should
only be held with HSBC, not a local bank.
While some individual businesses with a prior HSBC relationship were already using HSBCnet, this was
rolled out to all Smith & Nephew’s Asian subsidiaries plus central treasury. Those already using HSBCnet
had it reconfigured to operate on a regional rather than local basis.
Benefits
The benefits Smith & Nephew has achieved by consolidating local entity bank accounts in Asia fall into
five main areas:
Perspectives
The choice of HSBC represented something of a policy exception for the company, which accesses
much of its funding via a large syndicated loan facility involving some 20 banks. Normally, banking or
foreign-exchange business is only awarded to banks in the syndicate, of which HSBC was not a member,
but HSBC was considered in this case as the bank was prepared to extend credit in these markets.
Visibility
The introduction of HSBCnet has dramatically improved central treasury’s visibility of the financial flows
of the company’s Asian subsidiaries. In addition to being able to see the daily cash position at a glance
for all entities, treasury can now easily track cash trends and also check that no subsidiaries are holding
excess cash for an extended period that could otherwise be used to repatriate dividends or to repay any
outstanding inter-company loans.
Risk
Perspectives
Counterparty risks relating to cash surpluses have been substantially reduced by ensuring that all such
surpluses are always held with HSBC. Improved visibility at a central treasury level also minimises the
risk of local fraud. The company’s local investment policy is that only straightforward cash deposits
of three months or less are permitted, and the introduction of HSBCnet gives treasury the visibility
necessary to ensure that this is observed.
Control
By setting up treasury as an HSBCnet system administrator on subsidiaries’ accounts in Asia, centralised
control has been enhanced. While treasury is not involved in day-to-day matters such as subsidiaries’
payments to suppliers, it is able to monitor and control settings such as payment limits and signatory
groups. Therefore, if a subsidiary wants to change its payment limits or add a new user or open a new
account, the system automatically requires authorisation from the second system administrator, which
has to be someone in central treasury.
Costs
The consolidation of Asian transaction bank accounts has reduced banking costs for the region, at a high
level in terms of maintenance costs, and also in certain countries at an individual transaction pricing level.
Forecasting
The new account structure and HSBCnet have given treasury the ability to easily track trends in cash
flows, which will improve the accuracy of centralised cash flow forecasting. This will be particularly
useful in calculating a typical core cash level for each entity. Regular deviations around that can then be
identified to predict when a particular business unit is likely to be in surplus/deficit. Under the previous
arrangements, the month-end report gave no insight as to when a business unit’s customers were
settling their invoices, so there was the risk of significant cash balances sitting idle in current accounts
that could otherwise be repatriated or used to pay down inter-company loans.
Conclusion: the Future
At the time of implementation, Smith & Nephew’s Asian businesses were not generating sufficient
aggregate cash to make the implementation of a regional liquidity overlay worthwhile, so the project was
initially limited to the rationalisation of bank account provision. This had the incidental benefit of leaving
the execution of short-term investment with local finance directors, which fostered an increased degree
of local cooperation with the implementation.
In the longer term, the expectation is that Asia will prove a substantial growth market for the company’s
products and that this will give rise to significant cash surpluses, at which point some form of regional
liquidity structure would be appropriate. While predicting the timing of this “cash critical mass” is
obviously difficult, when that moment arrives much of the bank account “plumbing” required to underpin
such a structure will already be in place. Therefore, while the company has already achieved appreciable
benefits from the project, the best may be yet to come.
Smith & Nephew is a global medical technology business and has been developing advanced
medical devices for healthcare for more than 150 years, with its technologies enabling nurses,
surgeons and other medical practitioners to provide effective treatment more quickly and
economically. The company operates in high-growth markets driven by ageing demographics and
technology’s ability to enable patients to live longer and enjoy more active lives.
Smith & Nephew has global leadership positions in Orthopaedics, including Reconstruction,
Trauma and Clinical Therapies; Endoscopy; Sports Medicine; and Advanced Wound Management.
The company’s global infrastructure continues to expand each year and it currently has
distribution channels, purchasing agents and buying entities in over 90 countries worldwide.
Smith & Nephew is dedicated to helping improve people’s lives. The company prides itself on the
strength of its relationships with its surgeons and professional healthcare customers, with whom
its name is synonymous with high standards of performance, innovation and trust.
Since 2003, Smith & Nephew has grown its revenues by more than 65% to reach nearly
USD3.8bn in 2009. Its business strategy is based on supporting its customers through
researching, developing, manufacturing and marketing technically innovative and advanced
medical devices, which requires significant investment. For instance, in 2009 the company
invested approximately 4% of its sales (USD155m) in research and development activities.
Perspectives
About Smith & Nephew
Nolan S Adarve, Senior Vice President, Regional High Value Payments and FI Payments and Clearing, Product
Management, Global Payments and Cash Management, Asia Pacific, HSBC, Hong Kong
• The multiplicity of payment systems across Asia makes delivering full coverage a challenge for
even the global banks.
• When selecting their global or regional transaction bank, treasurers need a clear understanding
of how possible candidates will deliver this payment coverage through their bank alliance
partnerships.
• It also requires treasury insight into candidate banks’ due diligence processes when choosing
their alliance partners. This is essential if treasurers are to ensure that their corporation’s credit
and operational risks are managed effectively and maximum information transparency relating to
their cash management activities is always maintained.
• Where a transaction bank has a robust due diligence process for selecting its bank alliance
partners, the corporate client will benefit from the optimal balance of streamlined payments and
collections, competitive pricing, and well-managed risk.
I
n an increasingly globalised world, corporate treasuries find themselves having to cast their payment
and collection networks ever wider. Valuable commercial opportunities in remote locations can only be
profitably exploited if supported by an efficient distribution network; a global brand is only as global as
the reach of its treasury.
While the global transaction banks that are likely to be used by mid-sized and large corporations have
a reasonably good network footprint and cutting edge products, even they will not have a physical
presence in every corner of their corporate clients’ markets. Therefore, to deliver a truly global payments
and collections service required by their corporate clients, they leverage a network of bank alliance
relationships.
My Partner’s Alliance is My Alliance
In one sense, the treasurer should not need to be too closely involved in this interbank relationship. For
example, if there are problems with a payment being handled by the bank alliance, the issue should be
resolved by the treasurer’s transaction bank rather than by the treasurer.
However, in several other senses the treasurer must be involved. The process by which the corporation’s
transaction bank selects its bank alliance partners should be a matter of the keenest interest. What due
diligence is it conducting around potential alliances’ credit standing, connectivity to local clearing systems,
payments and collection capabilities, operating hours, technological ability, cut-off times, geographic
coverage, reporting formats and frequency, as well as regulatory compliance? All of these factors have a
direct bearing on the service quality and risks experienced by the corporation. If the transaction bank is
less than rigorous in this due diligence and its ongoing bank alliance network management, the corporate
client will be directly affected by any alliance shortcomings.
Before moving on to consider some of these due diligence criteria in more detail, it’s worth pausing to
observe that when it comes to bank alliance relationships, the obvious course of action isn’t necessarily
the right one.
A classic example of this is the assumption that the largest
local bank with the most extensive physical network in a
particular country is the alliance that can and should handle
the transactions of the corporate client concerned. A local
bank may have been ranked as “Best Local Bank” by
assorted banking magazines, so it must surely be the right
choice? Probably not: in practice larger local banks often
regard their bricks and mortar as their major competitive
advantage and will not wish to dilute this by sharing it with
a regional or global transaction bank. In addition, such banks are often quite conservative in their outlook
and may also be rather behind the curve when it comes to technology.
By contrast a mid-sized local bank – and especially one where a good proportion of staff have experience
working for a regional or global transaction bank – will frequently be progressive in its thinking. It will
already understand the more sophisticated requirements of the regional or global corporate in terms of
the functionality and service needed. In addition, these banks will typically be far more willing to adapt
and enhance their capabilities as necessary to meet the alliance requirements of a global transaction
bank and its corporate clients.
In fact many of these more innovative mid-sized banks have identified bank alliance as a niche in which
they particularly wish to compete and so have deliberately set themselves up as potential partners for
regional or global transaction banks. They may lack the scale of the in-country footprint of the largest
local banks, but they will still have sufficient footprint for the requirements of a regional or global
transaction bank servicing mid-sized and large corporations, and will be flexible in their thinking and
technology. They will also have more experience in handling technology implementations.
These last points are particularly important, because while it is possible to manually achieve
a reasonable degree of processing efficiency in low cost locations, this does not deliver the
automation needed to keep electronic information flowing smoothly between the transaction bank
and the bank alliance. The information flow ultimately delivered to the corporate client is obviously
dependent upon the quality of this interbank flow, so treasurers need to be keenly aware of the
capabilities in this respect of the bank alliances that will be involved in handling their transactions.
However, expertise alone in this respect is insufficient; the local bank must also be able to
Perspectives
The Obvious isn’t So Obvious
demonstrate solid experience if it is to deliver service levels appropriate to the needs of a global
corporation.
Critical Considerations
While there are a broad range of criteria that a transaction bank should use when conducting its due
diligence, it is worth remarking at the outset that this cannot be a static process. A due diligence revisit
on a periodic basis is important. This has the ancillary benefit that current and potential alliances are kept
on their mettle by these regular reviews.
Perspectives
Service and Geography
Payment cut off times and timeliness of crediting funds are key to payment obligations and liquidity
management and of course the bank alliance must offer the best available service level locally. An
important point regarding a bank alliance’s service level is how well it aligns with the service level
commitment offered by the transaction bank to its corporate clients.
Logically, both the corporate client and their transaction
bank have an interest in minimising the number of
alliances required to cover a particular geography. From
a corporate perspective, using one (or only a few) good
large or mid-sized local banks for a particular jurisdiction
increases the likelihood of higher levels of functionality
and service – and lower costs. By contrast, if multiple
small local banks have to be used, these are less likely to be able to offer features such as automated
connectivity. From the transaction bank’s perspective, having to maintain numerous small low volume
alliance relationships in order to provide service in a particular country is costly and inefficient; having
fewer larger relationships with technically oriented bank alliance partners is obviously preferable.
Reporting
From a corporate viewpoint, the quality of an alliance’s reporting is of paramount importance. If of a high
standard it will facilitate corporate STP, but can also be leveraged to reduce working capital and enhance
returns on liquidity. Therefore, any transaction bank worth its salt needs to be particularly thorough when
assessing this aspect of an alliance’s performance.
The alliance’s ability to capture transaction information that can be transmitted to the transaction
bank and ultimately to its corporate client for reconciliation purposes is vital. The format in which this
information is transmitted is similarly important. Most global transaction banks will ideally prefer their
own internal format to be used in order to minimise any translation issues and to expedite transmission
on to the corporate client. However, common standards such as SWIFT MT940s are also acceptable –
especially given the number of large corporations starting to adopt SWIFT formats themselves.
The corollary to this is connectivity: which transport mechanism will the alliance use? Probably the most
convenient for the transaction bank and also the one that will facilitate the timeliest onward transmission
to the corporate client is direct host-to-host connectivity. By contrast, at the opposite extreme, a local
bank that can only provide paper deposit slips (and expects the transaction bank to scan these) is
certainly not the best alliance around.
Other factors include the frequency of the alliance’s reporting cycle, the incidence of delays in submitting
reports and the accuracy of data capture. The very best in class local banks can operate to a very high
standard in this respect, so corporates can expect them to have a frequent or even real-time reporting
cycle.
The over-arching point about an alliance’s reporting is that the more efficient and automated it is, the
greater the benefits for the transaction bank’s corporate clients. More timely balance reporting in even
the remotest locations translates into faster and better use of corporate cash.
Compliance is an area where global transaction banks will typically be extremely conservative when
choosing alliances and, because of the potential reputational risks to themselves, will expect high
standards. They will therefore be particularly alert to any possible probity issues relating to the bank
alliance’s senior officers and will be careful to ensure that the alliance has a good track record with the
local regulatory bodies.
On the operational side, they should also be taking a close interest in the quality of the alliance’s disaster
recovery and backup planning. A more recent compliance consideration is the technological capabilities
relating to anti-money laundering. For instance, while many alliances will have basic SWIFT capabilities,
they may not as yet be able to handle the new SWIFT COV message types.
Counterparty Risk
The financial stability of alliances is obviously of concern to both transaction banks and their corporate
clients. One method of assessing the credit risk of a bank alliance is to examine the spread between its
credit rating and its domestic market’s sovereign rating. For example, if an alliance is two rating levels
below the sovereign rating, this would be regarded as acceptable by most global transaction banks, but
probably not if it were eight levels below.
Any corporate seeing its transactions flowing through
an alliance network should have confidence that its
transaction bank does not regard the credit assessment
of alliances as an occasional exercise. Particularly in the
aftermath of the credit crisis, it should go without saying
that this is undertaken regularly.
This regular diligence isn’t just a question of guarding
against capital losses (many multinationals will tightly cap
the amount of their cash that can be held with local banks
anyway); it is also very much an operational matter. The operational and reputational risks for a major
corporate of suddenly finding that it can make neither payments or collections in a particular country due
to an alliance failure are obviously considerable.
Perspectives
Compliance
Conclusion
In view of the complexities of cash management in Asia, a global transaction bank may easily find
itself maintaining a network of possibly dozens of alliances in the region in order to service the cash
management needs of their corporate clients. The quality of its network management therefore
obviously has a huge influence on the quality of service the corporate client ultimately receives.
Perspectives
As such, the corporate treasury will understandably have high expectations for its transaction bank’s
use of bank alliances. To be certain that this is delivered in practice, the corporate treasury needs to be
prepared not only to evaluate the offering of the transaction bank, but also to understand the dependency
of that offering on bank alliances delivering what they have undertaken with the transaction bank.
The Benefits of
Bilateral Banking
• To reduce transaction costs and maximise
gains from trade relationships, countries
have often made use of bilateral, multilateral and regional agreements.
• This increase in bilateral trade offers the
opportunity of “bilateral banking” for
importers and exporters, where the same
bank acts on behalf of both counterparties in
a trade transaction.
• Dealing with a single bank provides
importers and exporters with greater
efficiency and transparency in relation to
their trade transactions.
• Other advantages include improved
communication, lower costs, quicker
transaction completion, bespoke services
and competitive financing.
Aman Dalal, Vice President, Product Management, Trade and Supply Chain, HSBC, India
C
ross-border trade around the globe has been rising and is expected to continue to play an increasingly
important role in economic growth. Trade currently represents some 30% of world gross domestic
product (GDP) and is expected to grow to 50% of world GDP by 2020, according to ESCAP, the UN
Economic and Social Commission for Asia and the Pacific. It is also increasingly accepted that greater
participation in international trade is a prerequisite for economic growth and sustainable development in
today’s competitive world economy. However, while such a consensus holds at an academic level, there
are issues when it comes to implementation. Tariff and non-tariff barriers remain high in many countries
and discordant comments about countries’ protectionist policies are not uncommon.
Preferential Trade Agreements
To reduce transaction costs and to maximise the gains from trade relationships, countries have often
made use of bilateral, multi-lateral and regional trade agreements. The aim is to choose trading partners
with care and then to develop these relationships into mutually beneficial arrangements. These
arrangements often go beyond just trading relationships and evolve into broader partnerships covering
areas ranging from investment to political understanding.
In Asia, the period of rapid economic growth before the recent economic slowdown saw the execution
of a number of trade agreements. Prominent among these was the China-ASEAN free trade agreement,
which eliminated tariffs on more than 90% of the products traded in the region. Such agreements have
been a real boon to trade in these turbulent times and Asian countries have benefited accordingly.
Bilateral Trade Arrangements
While multi-party trade agreements are valuable, bilateral trade arrangements have the particular
advantage that it is much easier to manage political, operational and many other issues in a twoparty relationship. The Brazil-China trade corridor is a good example – bilateral trade between the two
countries has grown at a remarkable pace over the last decade. This has been due to a combination of
many factors but the complementary nature of Brazil’s and China’s economies has been a key element.
The resource-rich Brazil can export basic commodities such as copper, soy and iron ore to resourcehungry Chinese industries, while Brazil’s aspirational and growing consumer class can buy a wide
range of competitively priced finished products, such as consumer durables, from China. Bilateral trade
relations between the two countries have been further strengthened by increased capital investment on
the part of China into Brazil and heightened cooperation in the political sphere. An indication of the extent
of this cooperation is the fact that the two countries are in talks to eliminate the US dollar (USD) from
their trade transactions and settle in either the Chinese yuan (CNY) or the Brazilian real (BRL) instead.
Perspectives
Bilateral Banking
This increase in bilateral trade throws up another opportunity for importers and exporters, that of “bilateral
banking”, which essentially means having the same bank act on behalf of both counterparties to a trade
transaction. This offers the following advantages:
transaction efficiency;
improved communication;
lower costs;
quicker transaction completion;
bespoke services; and
competitive financing.
Trade Flows Under Documentary Credit
As an example, an exporter receiving payments under a usance documentary credit potentially enjoys
several advantages if the same bank is handling both ends of the transaction. The exporter is able to
obtain non-recourse financing post the acceptance of documents. And, by restricting the documentary
credit for negotiation in favour of the same bank, the importer benefits from additional negotiating power
secured by arranging competitively priced foreign currency funding for the exporter locally in a large
number of countries.
Where sight documentary credits are used, both parties can also benefit from bilateral banking
arrangements. Exporters can achieve faster resolution if there are documentary discrepancies, as
the bank should be able to effect this internally between its offices involved in the transaction using a
network such as SWIFT. At the same time, the importer should be able to obtain extended credit terms
from the bank office with which it is dealing.
Trade Flows Under Non-Documentary Credit
Where a single bank acts for both parties, it is also possible to improve the process of presentation of
non-documentary credit bills. The bank office acting for the exporter can transmit the documents to the
importer’s bank office, where the details are captured and the exporter contacts the beneficiary. Once
the payment or acceptance is in place, the exporter’s bank office dispatches the bill to the importer’s
bank office (endorsing the bill of lading where necessary).
The importer may also benefit by:
Having the opportunity to extend the credit period, either by offering buyers credit or usance paid at
sight, or reimbursement financing.
Avalisation at the importer’s bank office giving the importer the opportunity to negotiate finer pricing
from their exporter. The exporter should be willing to agree to this in lieu of any credit period it is
currently providing to the importer.
Faster resolution of document discrepancies.
The bank possibly offering rebates for clients using bilateral proposition.
The customer exploring the possibility of customised trade-related management instructions to be
sent by banks for their business in particular trade corridors.
Conclusion
Dealing with a single bank provides importers and exporters with greater efficiency and transparency
in relation to their trade transactions. However, the extent to which these benefits can be realised is
highly dependent upon the provider bank’s trade finance capabilities and network footprint. A bilateral
trade proposition from a bank with global presence, trade specialisation and a strong balance sheet
will maximise the opportunity by delivering competitive funding, faster turnaround times and funding
currency flexibility.
Perspectives
The benefits to the exporter are:
Faster turnaround time as there is single point of scrutiny, thereby achieving quicker receipt of funds
or acceptance; and,
Possibility of raising finance via the avalised bill route or through discounting of bills onshore based on
the avalisation added by the office acting for the importer.
Case Study: Interact
Interact, a company that exports garment accessories to Bangladesh, has been an HSBC India client
since mid-2009. Because of fierce competition and other market-related issues, the customer was not
able to increase export turnover. Issues the client was facing were:
• Being a small trader, the company was not able to extend credit to its buyers;
• The cost of financing was so high that it was not able to arrange finance, which affected the
company’s capacity to compete with other suppliers; and,
• Time taken for documentary credit advising was longer than expected and, in turn, was affecting the
turnaround time for shipment.
Perspectives
In addition, documentary credits received by the company were issued in Bangladesh from multiple
banks that were different from the company’s bankers.
As a result of these problems, the company was not in a position to explore other markets, such as the
Middle East, which was a lucrative area for its products.
HSBC proposed a bilateral trade solution that took advantage of the bank’s presence in both India
and Bangladesh to ensure faster cash receipts on the company’s exports to Bangladesh, by way of
discounting bills under document credit issued by Bangladeshi banks with the help of HSBC Bangladesh.
The company accepted the proposal and submitted its bills under the documentary credit and received
funds on the basis of confirmation from HSBC Dhaka in a turnaround time of three days. This reduction
was significant enough to reduce the company’s interest costs and help it to manage its working capital
better. As a result, the company has grown several times over, with an increased presence in the Middle
East as well.
Out of Japan: Supporting Overseas
Expansion with a Regional Treasury Centre
Kiyono Hasaka, Vice President, Regional Sales, Global Payments and Cash Management, HSBC, Singapore
• Japanese companies have a culture which is very distinct from those elsewhere in Asia. This
poses unique challenges when expanding overseas.
• These challenges can be overcome, but doing so requires careful planning and a degree of
willingness to embrace change.
• Many mid-sized Japanese corporates have not regionalised financial management processes.
This is often due to a conservative approach and strong ties with Japanese banks.
• Global banks have capabilities and tools available today to help regionalise and globalise cash and
treasury management activities for all Japanese corporates.
F
or corporates expanding beyond their domestic market much is new and challenging. While this
applies to all functions within the corporation, the treasury department faces some of the greatest
challenges. In addition to coping with unfamiliar business practices, treasury also has to acquaint itself
with a great deal of new infrastructure: regulations, tax regimes, banking practices, finance and clearing
systems will all be new.
Particularly when corporate expansion encompasses multiple countries in Asia, one effective way of
quickly coming to grips with this new external environment is to establish a regional treasury centre.
If this strategy is executed effectively and the centre is staffed with experienced professionals, it
immediately delivers the necessary expertise both in terms of individual market knowledge and global
best practice.
Unique Challenges for Japanese Corporates
All this is true of any corporates reaching into new markets, but for Japanese corporates there is the
additional hurdle of addressing some corporate culture issues exclusive to Japan. An obvious example
is that Japanese corporates have a long standing history of local business units having a high degree
of financial autonomy. While this applies to some extent to corporates from other Asian countries, it is
generally far less ingrained. This is partly due to a form of national corporate ethos: while Chinese or
Korean corporates have a natural affinity for rationalisation
(which lends itself well to centralisation) Japanese
corporations traditionally tend to be strongly relationship
driven (which does not).
Perspectives
This relationship driven corporate culture is clearly
reflected in the way Japanese corporations interact with
their banks, where there are often strong, long-standing
ties between corporates and their main banks, which may even extend to cross-shareholdings and the
presence of senior bank staff on the corporate’s board. If Japanese banks are unable to offer the type
of products and solutions appropriate to regional treasury management, then this obviously affects the
ability of Japanese corporations to regionalise treasury management strategy.
Another point is that very few Japanese corporations use English in the domestic workplace, which
tends to isolate them from global treasury best practice as this represents a barrier to treasury
professionals from other countries seeking employment in Japan. As a result, the significance of global
and regional treasury centres in delivering greater operational and financial efficiency is generally less
communicated and thus less appreciated in Japanese corporations.
The irony is that the current strength of the Japanese yen (especially against the US dollar) now makes
it a highly convenient and inexpensive time for Japanese corporations to acquire businesses overseas
and globalise the companies. However, the key question then is the steps they need to take to ensure
that their regional/global treasury strategy keeps pace with and supports their regional/global business
strategy.
Senior Executive Sponsorship
One of the most important steps is obtaining senior management buy-in and support. Securing senior
executive sponsorship in order to establish full commitment to regionalising (and ultimately globalising)
treasury management is essential. The ideal scenario is to successfully establish strong leadership at
board level to demonstrate and communicate the vision, goal, scope and strategy for establishing a
regional treasury centre, or a global centre with regional subsidiaries.
As mentioned above, many Japanese corporates have a relatively decentralised approach in their regional
operations and will allow fully owned subsidiaries to run their own finance operations. Therefore, senior
management sponsorship is crucial to ensuring the successful buy-in of management in any existing
local business units, who will have to give up responsibility for some treasury management tasks as a
result of centralisation.
Furthermore, as Japanese corporates with existing overseas operations may also have a geographic
coverage that extends beyond Asia Pacific, group communication backed by senior management
sponsorship is especially important. Such group communication should clearly state the estimated
annual cost savings and efficiencies across the subsidiaries and countries concerned.
Bigger Picture Bank Relationships
However, it is important to cast the net wider when it comes to banking relationships, as the choice
of banking partner plays a major role in determining the ability of Japanese corporates to regionalise/
globalise their cash and treasury management efficiently. Japanese banks are clearly dominant players
in domestic cash management, but global banks can have more to offer when it comes to non-domestic
and global cash and treasury capabilities. For example, they can deliver standardised back office systems
to ensure consistent reporting, file transfer and corporateto-bank connectivity, and can also provide sophisticated
communication tools, as well as centralised liquidity and
management of accounts receivable. On the basis of this
expertise, certain global banks are best placed to offer the
sort of consultative relationship that will smooth the path
to regionalising/globalising treasury strategy.
Cost Justification
Since many mid-sized Japanese corporates are required to undertake treasury management tasks with
limited resources, they often face the challenge of justifying the cost of changing existing processes
and banks. The cost of banking services includes system implementation and customisation, as well as
transaction and credit facility costs along global supply chains of working capital, trade finance and FX
management. While foreign banks typically take a conservative view of extending and pricing liquidity
support in challenging economic conditions, Japanese banks – due to the historic ties mentioned above
– are often in a better position to meet these requirements. However, it is important to take a longer
term view here: while there may be short term implications to considering global providers, on a more
strategic long term basis the argument is often compelling.
Process Automation and Standardisation
Two of the more compelling arguments for a regional/global treasury management strategy are
automation and standardisation. For larger Japanese corporates, using SWIFT for Corporates as a core
communication channel looks attractive in both respects. While the first corporate adopters connected
directly with SWIFT, the second wave connect via service bureaux which host the SWIFT gateway/
middleware and help translate files from corporate systems to SWIFT formats. As global banks
continue to seek industry-wide messaging standards such as ISO 20022, large companies can leverage
connectivity solutions to achieve greater convenience, automation and standardisation. Global banks
are increasingly partnering with SWIFT and third-party vendors to mix and match services and create
bank-independent cash and treasury management structures. This has considerable appeal for treasury
centres looking to improve multi-bank communications.
Perspectives
Many Japanese corporates have a traditional corporate culture that can hinder attempts at innovation by
younger finance managers in treasury centres. This can be particularly apparent when it comes to the
question of bank relationships mentioned earlier, where Japanese corporates may prefer to stick with
the status quo, rather than make use of the regional and global cash management resources of foreign
banks that would facilitate the efficiencies of a regional treasury centre.
Standardised cross-border liquidity is an important concern for Japanese corporates when dealing with
regulated currencies and markets in Asia, such as China, India, Vietnam, Indonesia, the Philippines,
Malaysia, Thailand, Korea and Taiwan. Unlike Europe and North America, Asia is a highly complex region
in terms of geography, languages, regulations and tax regimes. With comprehensive cash and treasury
management capabilities and extensive international footprints, global banks are in a better position to
advise corporates with complex liquidity positions and requirements, formulating solutions suited to their
needs that are also delivered via standardised internal processes .
Perspectives
Mid-Sized Corporates
Mid-sized Japanese corporates that are planning to embark on the centralisation of treasury management
are in a slightly different position than their larger brethren. The early stages of centralisation may
still be similar and include securing buy-in from senior management and local subsidiaries as well as
establishing processes to gain visibility and control of cash to facilitate efficient funding and investment.
However, in the latter stages, instead of undertaking an accounting/ Enterprise Resource Planning
(ERP) implementation, they are often better served by an electronic banking tool that can be easily set
up to meet similar objectives. Subsequent stages include rationalising account structures to eliminate
unnecessary accounts and setting up e-banking systems to centralise cash to core bank(s) easily and
quickly. Once the basic set-up is in place, the next step is to consolidate business activities within the
regional or global treasury centre. With their geographic presence and access to best practice and global
product capabilities, this is where global banks can create value.
Partial Outsourcing
Japanese corporates that continue to take the decentralised approach will need to perform a number of
treasury management activities in each country, often with limited resources. A valuable remedy for this
situation is partial outsourcing, where global banks can add value by automating and outsourcing some of
these activities to reduce administrative time and overheads. These include accounts payable, processing
of manual payment reconciliation and the writing, signing and mailing of cheques. Outsourcing some
treasury management tasks in this manner frees up time, improves productivity and reduces operational
costs. Based on their experience in supporting regional and global treasury centres, global banks can
provide a wide range of services to automate and simplify treasury management operations.
Conclusion
Migrating to a regional/global treasury strategy often requires a significant change in mindset for many
Japanese corporates. In short, there is a need to look at the bigger picture: long standing domestic
practices in areas such as banking will need to be rethought. For example, by establishing strategic
partnerships with global banks, Japanese corporates can take advantage of their presence and global
product capabilities to achieve and enhance regionalisation and globalisation of treasury management
activities.
Obviously, the right choice of banking partner is important, and a common concern in this respect is
the ability to deliver highly focused local expertise, but also in conjunction with a consultative global
Currently there are around 2,000 Japanese corporates from multiple industry sectors registered in
Singapore and as of March 2009 over 600 corporates were registered as members of the Japanese
Chamber of Commerce and Industry, Singapore. Some of these corporates established finance
subsidiaries and acquired Finance and Treasury Centre (FTC) status as part of the tax incentive scheme
administered by the Economic Development Board and the Monetary Authority of Singapore. Introduced
in 2004, FTC status grants a concessionary tax rate of 10% on fees, interest, dividends and gains from
qualifying services and activities for a period of five to ten years. It also provides for a flat waiver on
withholding taxes normally levied against interest payments for funds collected from other subsidiaries.
Cross-border fund movements typically incur withholding taxes that inevitably create higher funding
costs for the subsidiaries in the region. Singapore therefore provides a significant incentive for Japanese
corporates looking to locate regional and global treasury centres.
Along with a substantial capital commitment to Singapore since the 1970s, large Japanese corporates
have invested a significant amount of time and effort in educating local professionals. Transferring
skills and knowledge to local staff has been instrumental in running and managing regional and global
financial processes from Singapore. Successful treasury centres are typically led by long-serving local
professionals with the full backing and authorisation of Japanese senior management. As a result, there
is an established pool of treasury expertise in Singapore that newcomers can draw upon.
Perspectives
perspective. This combination would be important in any region of the globe but is even more important
in Asia, where dealing with myriad local regulations is clearly a concern. Nevertheless, this isn’t
insurmountable: given the right banking expertise, Asia can be a remarkably homogenous place in which
to do business.
Where To Go?
Perspectives
For Japanese corporates looking to go global or regional with their treasury management one
obvious location for a treasury centre is Singapore, which has a long pedigree in this respect.
Rapid expansion of Japanese business in Singapore dates back to the early 1970s, when major
Japanese corporates shifted their manufacturing activities out of Japan and into Southeast Asia
due to anticipated growth in the region. Early arrivals included leading Japanese technology
companies such as Hitachi, Sony, Panasonic, Toshiba, Fujitsu and Mitsubishi.
An Exception:
Capitalising on Advanced Technology
Leading Japanese technology companies avoid many of the caveats that apply to their peers,
because they have the natural advantage of being able to capitalise on advanced technology to
automate and streamline operations internally, as well as for their clients. As major technology
service providers, these companies service both corporations and banks. On some occasions a
strategic partnership develops, whereby a company provides technology services in exchange
for a certain volume of banking transactions from a bank client. Close collaboration with global
banks enables technology companies to jointly design and implement core banking platforms.
As a result, these companies can also gain insights into the technical and operational aspects
of financial management solutions designed and jointly developed with banks. By contrast,
Japanese corporates in other sectors have no equal opportunity to develop such a relationship
with global banks. As a result, leading Japanese technology companies are in a better position to
take the lead in global and regional treasury management.
Japan’s Corporate Culture:
The Challenges for
Regional Treasurers
• While some regional treasurers treat Japan
as any other Asian country, some view it as
a special case and exclude it from global or
regional treasury schemes.
• The language barrier and the unfamiliar
Japanese business culture are major
hurdles. The lack of English among local
treasurers, for example, makes it difficult for
them to learn international best practice.
• Understanding the background to Japan’s
corporate culture can assist regional
treasurers in overcoming some of the
challenges when dealing with local offices.
• Despite the challenges, there are wellestablished strategies for regional and global
treasurers to take.
Jun Takane, Vice President, Sales, Global Payments and Cash Management, HSBC, Japan
F
or global treasuries looking to maximise efficiencies through process standardisation and centralised
control, Japan represents something of a challenge. Barriers such as language, unfamiliar business
culture and domestic dominance of local banks can impede the inclusion of Japanese business units
within a global or regional treasury strategy. However, there are strategic options for treasuries to choose
from, as well as an evolving business culture.
Barriers: and How to Surmount Them
Let us first examine a number of these barriers in more detail. A greater understanding of the operating
context in Japan will show that, while this task of developing a finance/treasury strategy may be
challenging, it is definitely not insurmountable.
Language
For many foreign companies operating in Japan, communication is a major hurdle. Japanese still
dominates the business world in the country. English is not commonly accepted even by staff with a
higher education, which makes it difficult for Japanese to learn treasury best practice or gain information
about the latest developments in the west (the same applies vice versa, of course).
Historically, Japan has relied on the size and strength of its domestic market and therefore most
companies have communicated purely in Japanese for business. However, with the globalisation of
trade and information, such a homogeneous working environment has its limitations, and Japan will have
to improve its English language skills if it is to remain competitive internationally.
There are signs that this shift is already underway: a number of companies in Japan are believed to make
English language skills mandatory for certain management levels. More recently, online shopping giant
Rakuten announced that it will make English a standard language within the company by 2012.
Lack of an International Treasury Community in Japan
Partly due to this lack of language skills, an international treasury community has not developed in Japan.
There is little opportunity for Japan’s corporate treasurers to discuss treasury issues or case studies
with their overseas industry peers. EuroFinance, for example, held its second international treasury
management conference in Japan in 2010. The official language of the speeches was Japanese.
Perspectives
Much best practice in the treasury world comes from Europe, the US or the Asia-Pacific region, where
conferences and working groups are organised regularly to discuss the latest issues and opportunities in
treasury, cash management and payments. Their common language is English. Consequently, Japanese
treasurers are often effectively cut off from recent developments. This has resulted in Japan developing
its own treasury management practices, which differ from globally developed standards.
One solution to this problem leverages the rather slow pace of employment turnover in Japan, which
often frustrates ambitious young treasury/finance personnel. Some companies have taken advantage
of this to rotate such personnel through work placements elsewhere in Asia (such as Singapore) before
returning them to Japan. In this manner, the company acquires a core of native Japanese speakers who
have been exposed to global treasury best practice.
Using a global bank is another way in which to widen the exposure of Japanese staff to the latest
treasury techniques. Through interaction with bank personnel, staff will learn more about cutting edge
treasury and bank technology, as well as current best practice in areas such as liquidity management and
short term investment.
The Zengin System
In Europe, with the introduction of the Single Euro Payments Area, there has been a move towards
standardising payment systems so that international payments can be processed as simply and cheaply
as domestic payments. In Japan, however, the Zengin System – the domestic electronic funds transfer
system for yen (JPY) – requires knowledge of Japanese, as beneficiary names often need to be input in
the local katakana script. Therefore, unless they have Japanese-language capabilities, multinationals find
that they cannot manage their JPY funds centrally from outside Japan.
There are two ways that multinationals and foreign corporations commonly deal with this issue. One is
to use a conversion service offered by one of the global banks that takes beneficiary names in English
and converts them into katakana. The other is to outsource JPY payment operations to service providers
in China who can make the necessary conversions more cost effectively.
Japanese Business Culture
The Japanese tradition of job security can create a number of issues. Employees often stay with their
companies as long as they wish (unless they commit some serious offence), and many stay until
retirement. The downside to this security is that there is often no sense of urgency and little incentive for
greater creativity. In addition, many large Japanese organisations do not usually hire senior management
from other firms, which limits opportunities for companies to learn from the best talent in the market.
In addition, many large Japanese organisations reward staff at the same grade equally, regardless of
performance. Incentive-based salaries are rare; bonuses are paid according to performance, but the
range can be limited – employees who join in the same year will likely receive similar salaries and
bonuses. Furthermore, when judging an employee’s performance, many Japanese managers tend to
focus more on failures or mistakes than achievement.
The collective effect of these practices is that creativity and innovation in the Japanese workplace are
often disparaged – as the Japanese proverb “the nail that sticks out gets hammered down” suggests.
Therefore, for foreign companies looking to establish a cutting edge treasury/finance function, reversing
this mindset is a priority. Rotating Japanese personnel through posts elsewhere in Asia, Europe or the US
and teaching Japanese to experienced foreign treasury personnel are two ways of dealing with this issue.
There is often resistance among Japanese treasurers and other executives to foreign banks. There are
historical reasons for this. When Japan’s economy grew rapidly from the 1960s through to the 1980s,
many treasurers enjoyed extra perks, with banks entertaining them with a weekend of golf or dinner
and karaoke. In today’s economy, company treasurers may not receive the same level of treatment
but many remember “the good old days” and retain certain assumptions about the service level they
should receive from banks. For example, a Japanese banker may visit a client each day to pick up cash or
cheques for free, as part of the expected service.
In addition, brands have a powerful attraction in Japan. The most well-established conglomerates are
brands that Japanese feel comfortable with, even before considering service levels. Brand image, along
with resistance to change, can have a significant influence on some treasurers when comparing the service
offerings of banks. There is comfort, too, in being served by banks that hold equity in the company.
Since Japan’s financial “big bang” in 1998, deregulation has given companies easier access to financing
through the markets, ending the era of indirect financing. However, there is still the belief that Japanese
banks will help companies when they need financial support, as was the case during the boom years.
This belief binds Japanese treasurers to local Japanese banks, even though they may not have an
appetite for credit or be up to a speed in multi-country cash or treasury management offerings. The key
question, therefore, concerns incentives that will draw Japanese treasurers out of their comfort zones to
focus on benefits that apply at a company level.
The Role of Global Banks
While history might incline Japanese treasurers towards local banks, the case for using a global bank
when expanding into Japan is compelling. Some global banks have a very long Japanese pedigree: for
example, one prominent global bank has been providing corporate banking services in Japan for more
than a hundred years. Such a bank has the same understanding of Japanese culture as local banks and
will also have little difficulty in attracting top professionals from the local banking market.
In day to day terms, global banks can therefore deliver very similar domestic coverage to domestic banks.
There are a few exceptions, such as bank accounts for handling tax payments – but similar restrictions
apply elsewhere in Asia. Most global banks will have a local partner bank able to handle this sort of function,
so there are effectively no practical obstacles to using a global bank for Japanese domestic business.
However, a global bank enjoys a very significant advantage when it comes to integrating Japanese treasury
activities with regional and/or global treasury operations. It will have the tools and solutions necessary to
provide the requisite efficiencies in areas such as STP payments processing and liquidity management.
Perspectives
Relationships with Banks
Exclusive or Inclusive Strategy?
The barriers that have been outlined in this article typically drive corporate treasuries in one of two
directions: an exclusive or an inclusive strategy.
Exclusive
Central treasury decides that it is impractical to centralise treasury functions for Japanese business units.
It therefore opts to treat Japan as a special case and relies on local representatives to run the treasury
operations there, typically using only local banks. Providing the business units and local finance functions
perform well, central treasury will not interfere.
Perspectives
Inclusive
Central treasury allows the local office only limited autonomy and tries to include Japan in global or
regional treasury schemes. To be successful, adopting this strategy will require addressing the barriers
mentioned earlier.
Or a Pragmatic Approach
Multinationals moving into Japan often establish joint ventures with local partners. When deciding on the
approach to take for treasury/finance functions they will ask for advice from their partner, who will usually
recommend the exclusive option. However, some companies migrate between the two strategies. They
start with an exclusive strategy and then, as their understanding and comfort level with the environment
increases, they move to an inclusive strategy. A number of foreign fashion companies that began
their presence in Japan as joint ventures originally adopted the exclusive approach to treasury/finance.
However, several of these companies have recently been buying out their joint venture partners and
switching to an inclusive approach using global rather than local banks.
Many companies assume that the exclusive approach automatically implies having to use a local bank,
but this is not the case. In fact, there is much to be said for using a global bank, whichever strategy is
selected. Even if an exclusive strategy is chosen and local personnel have financial autonomy, selecting
a global bank can pave the way for future migration to an inclusive strategy – as well as immediately
enhancing risk management and visibility. For example, local finance personnel could have control of day
to day transactions and liquidity on bank accounts, but central treasury could still monitor these accounts
and download transaction data for reporting or audit purposes. If this type of global banking platform is
used from the outset and there is later a need to switch to an inclusive model, the only changes required
will be relatively trivial ones relating to transaction and access authorities; a complete revamp of the
account structure will not be necessary.
Conclusion
Despite its business practices and traditions there should be no need to treat Japan any differently
from other countries. There may be hurdles and domestic resistance to change, but flexible thinking
around personnel management combined with a consultative global banking relationship should ensure
the successful incorporation of Japanese business entities into any corporation’s central treasury
management or global treasury strategy.
Market Analysis
Market Analysis: Introduction
The following pages contain an introductory guide to the cash management environment in 19 countries
and territories in Asia Pacific. For the purposes of this Guide, “Asia Pacific” is defined as Australia,
Bangladesh, Brunei, China, Hong Kong SAR, India, Indonesia, Japan, Korea, Macau SAR, Malaysia,
Mauritius, New Zealand, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand and Vietnam1.
Each market analysis also includes basic trade facts and statistics for each market; the sources of which
are:
Population and Total area: Country profiles provided by the United Nations Statistics Division (data.
un.org/CountryProfile.aspx). Populations are reflective of the 2007 totals2.
Gross domestic product and Inflation rate (consumer prices): The International Monetary Fund’s
World Economic Outlook database, October 2010 edition3 (www.imf.org/external/pubs/ft/
weo/2010/02/weodata/index.aspx). Gross domestic product has been calculated using the
purchasing-power parity method and is denominated in international dollars4, while inflation rates are
based on average consumer prices.
Major exports and Major imports: United Nations Commodity Trade Statistics database (comtrade.
un.org/db/mr/rfReportersList.aspx).5
Exports, Imports, Major markets, Major suppliers, Total trade, and Trade with Asia: The International
Monetary Fund’s Direction of Trade Statistics database (www.imfstatistics.org/DOT). Exports are
calculated using free on board (f.o.b.) prices; imports are calculated using cost, insurance and freight
(c.i.f.) prices.6
The data provided is as of 3 November 2010, unless indicated otherwise.
If you have any questions about cash management or trade and supply chain in any of these markets,
please contact HSBC by telephone or e-mail (local contact details are shown at the end of each market
analysis).
1
2
3
4
5
6
Mauritius has been included due to its status as a key offshore financial centre for emerging Asian nations, i.e. India and
Thailand.
The statistics for Taiwan have been taken from the Taiwan government’s National Statistics web site (eng.stat.gov.tw).
The statistics for Macau have been taken from the Statistics and Census Service (DSEC) of Macau, (www.dsec.gov.mo/
e_index.html). The total and per-capital gross domestic product figures have been calculated using current prices and are
in US dollars.
International dollars are a hypothetical unit of currency which The World Bank defines as having the same purchasing
power over GDP as a US dollar has in the US. Therefore, an international dollar would buy in the cited country a
comparable amount of goods and services that a US dollar would buy in the US.
The information for Taiwan has been taken from the Taiwan government’s Bureau of Foreign Trade web site
(eweb.trade.gov.tw).
The information for Taiwan has been taken from the Taiwan government’s Bureau of Foreign Trade web site
(eweb.trade.gov.tw).
Market Analysis: Australia
Overview
Population
21.1 million
Total Area
7,692,024 sq km
Capital
Canberra
Major Language(s)
English
Time Zone
GMT + 10 hours
Currency
Australian Dollar (AUD)
Central Bank
GDP
The Reserve Bank of Australia
817.5bn (2009 est.); 1.0% real growth rate (2009 est.); 37,302 per
capita (2009 est.)
1.6% (2009 est.)
Inflation rate (consumer prices)
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD153.7bn (2009)
Imports c.i.f
Major Imports
Mineral fuels, mineral oils
and products; ores, slag and
ash; jewels, jewellery and
precious metals; meat and
edible meat offal; and other
commodities (2009)
USD176.5bn (2009)
Energy equipment and
energy-related machinery;
mineral fuels, mineral
oils and related products;
electrical machinery and
equipment; vehicles,
parts and accessories;
jewels, jewellery and
precious metals; and other
commodities (2009)
Major Suppliers
China - 17.78%, US - 11.16%,
China - 21.79%, Japan Japan - 8.29%, Thailand 19.17%, Korea - 7.88%, India (% of total)
5.76%, Singapore - 5.49%,
- 7.51%, US - 4.94%, UK Germany - 5.25% (2009)
4.36%, NZ - 4.09% (2009)
USD330.2bn (2009)
Total Trade with Asia USD213.4bn (2009)
Banking System and Bank Accounts
The central bank of Australia is the Reserve Bank of Australia (RBA), which is responsible for
monetary policy. Other significant RBA roles include maintaining financial system stability and
promoting the safety and efficiency of the payments system.
As of September 2010, there were 58 banks active in Australia with four main domestic banks:
National Australia Bank Ltd, Australia & New Zealand Banking Group Ltd, Westpac Banking
Corporation and the Commonwealth Bank of Australia.
The following types of bank accounts are currently available:
Account type
Resident
Local current1
Yes
Local savings
Yes
Foreign currency
current2
No
Foreign currency
savings
Yes
Non-resident
Yes
Yes
No
Yes
Credit interest
Yes
Yes
No
Yes
1. Cheque books are optional.
2. Cheque books are not available on foreign currency accounts.
Clearing Systems and Payment Instruments
There are four major payment clearing systems in Australia:
Clearing system
CS1
CS2
CS3
CS4
Comments
Australian Paper Clearing System (APCS) – an automated clearing
house for cheques, payment orders and other paper-based payment
instructions.
Bulk Electronic Clearing System (BECS), which manages the conduct
of exchange and the settlements of bulk electronic low-value
transactions in a similar fashion to the paper-based instructions in
APCS.
Consumer Electronic Clearing System (CECS) for proprietary cardbased automated teller machine (ATM) and electronic funds transfer
at point of sale (EFTPOS) transactions.
High-Value Clearing System (HVCS), which is integrated with the
Real-Time Gross Settlement (RTGS) clearing system. HVCS is for
high-value electronic payment instructions.
In Australia, there is only one clearing zone. Cheques are processed overnight for credit to the
account with funds held for a minimum of three working days. Interest is calculated on the balance of
the account and therefore earns interest for deposited funds even though they have not cleared.
Legal, Company and Regulatory
Australia has nine legal systems – the eight state and territory systems and one federal system.
The primary regulatory bodies that regulate financial services in Australia are:
• The Australian Prudential Regulation Authority (APRA), which undertakes prudential supervision of
deposit-taking institutions, insurance and superannuation funds;
• The Australian Securities and Investments Commission (ASIC), which is responsible for market
integrity, consumer protection and corporations; and
• AUSTRAC is responsible for customer identification, reporting, record keeping and other
requirements under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. It
receives information on the movement of cash and other forms of payment in and out of Australia.
Liquidity, Currency and Tax
There are no restrictions on currency movements or cash concentration in Australia; notional
pooling and cash concentration are permitted on a single and/or multi-currency basis. Functionality
Tax
Interest withholding tax
Comments
• Residents: 46.5% without tax file number, Australian business number,
or tax exemption certificates.
• Non-residents: 10% flat rate – no tax-free threshold applies for nonresidents.
Corporate tax
30%
Value-added tax or equivalent A goods and services tax (GST) applies in Australia at the rate of 10%
on the price of taxable supplies. Since most of the banks’ products
are “financial supplies”, no GST should apply in the majority of cases.
However, there are a few products supplied by banks, which are ‘taxable
supplies’ and will attract GST.
Market Watch
No recent or anticipated change of significance.
HSBC Global Payments and Cash Management
HSBC Trade and Supply Chain
Tel: [61] (2) 9006 5449
Tel: [61] (2) 9006 5100
depends upon banking partner capability, but more developed banks can offer fully automated cash
concentration solutions and (for notional pooling) considerable flexibility in determining interest rates
applicable to participating accounts.
Australia does not have an active commercial paper market, therefore treasuries looking for more
than just the overnight cash rate on surplus liquidity tend to use term deposits.
Offshore companies will incur withholding tax as per non-residents in the table below.
Market Analysis: Bangladesh
Overview
Population
160.0 million
Total Area
143,998 sq km
Capital
Dhaka
Major Language(s)
Bengali and English
Time Zone
GMT + 6 hours
Currency
Taka (BDT)
Central Bank
GDP
Bangladesh Bank
242.2bn (2009 est.); 5.4% real growth rate (est. 2009 est.); 1,470
per capita (2009 est.)
5.3% (2009 est.)
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD14.4bn (2009)
Apparel and clothing
accessories; fish and other
aquatic invertebrates;
vegetable textile fibres,
paper, yarn and fabric;
textile articles; and other
commodities (2007)
US - 20.24%, Germany 12.75%, UK - 8.64%, France
- 6.48%, Netherlands 5.90% (2009)
USD36.2bn (2009)
Imports c.i.f
Major Imports
USD21.8bn (2009)
Machinery and mechanical
appliances; mineral fuels,
mineral oils and products;
equipment; cotton; animal or
vegetable fats and oils; and
other commodities (2007)
Major Suppliers
China - 16.16%, India (% of total)
12.61%, Singapore - 7.55%,
Japan - 4.63%, Malaysia 4.46% (2009)
Bangladesh Bank (BB) is the central bank of Bangladesh. It has legal authority to supervise and
regulate the financial sector and issue the country’s currency. It also formulates and implements
monetary policy and manages foreign exchange reserves.
The banking system of Bangladesh consists of BB as the central bank, four nationalised commercial
banks (which hold 25% of the industry’s assets and 30% of deposits), five government-owned
specialised banks, 30 domestic private banks and 9 foreign banks.
For locally incorporated companies, the opening of a bank account requires the following
documentation:
• Board resolution;
Account type
Local current
Local savings
Foreign current
Foreign savings
Resident
Yes
Yes
Yes
No
1
Non-resident
Yes
Yes
Yes
No
Credit interest
No
Yes
Yes2
No
1. Can only be opened subject to travel history and local exchange control regulations, and with special permission from BB.
2. Interest applicable only on non-resident foreign currency term deposit accounts and resident foreign currency accounts.
Non-resident BDT accounts can be opened by companies resident outside Bangladesh, subject to
adherence to guidelines of BB.
Special notice deposit accounts (seven days’ notice) are allowed for foreign diplomatic missions
and their expatriate personnel, foreign airlines and shipping lines in Bangladesh, international nonprofit organisations, including charitable organisations, and United Nations organisations and their
expatriate personnel.
Clearing system
BB clearing houses
Sonali Bank’s clearing houses
BB large-value cheque settlement
system
BB foreign currency clearing
system
Comments
Operates in Dhaka and BB branches in seven other cities.
Operates in 31 towns where there are no BB branches.
For items with value BDT500,000 and above (same-day clearing and
clearable within specific clearing area).
Based in Dhaka – clears and settles foreign currency cheques and
pay orders.
There are also a limited number of clearing systems in upcountry rural locations. In these collection
areas, beneficiary bank representatives physically take cheques to the drawee bank for clearing. If
cheques are deposited on Day D, clearing through clearing systems will be completed on Day D+1.
Upcountry collection cheques will clear between Day D+3 and Day D+5.
Apart from Bangladesh Bank (BB), other important regulators include the Board of Investment, which
handles applications relating to foreign direct investment, the Register of Joint Stock Companies
(RJSC), which handles the creation of new companies, and the National Board of Revenue (the tax
authority).
Operating a foreign company as a branch or liaison office in Bangladesh requires permission.
Applications involve submitting a range of information to the Board of Investment, including:
• Corporate details, such as name, address, nationality, place of incorporation;
• Certified copy of the company’s memorandum and articles of association;
• Copy of the company’s certificate of incorporation;
• Trade license;
• Tax identification number;
• Transaction Profile; and
• Photograph, legal photo identification documents and Personal Information Forms of all signatories,
directors, principal shareholders and beneficial owners.
In the case of foreign corporations, all documentation must be attested by the Bangladesh High
Commission (Embassy) from the corporation’s country of origin.
• Shareholding details, including authorised capital, paid-up capital (equity/preference), directors’
details, shareholders’ details and nationality;
• Nature of business activity – whether trading, commercial, industrial, consultancy, etc.;
• Details of any existing government permission to operate business;
• Address where business will operate;
• Sources of financing for the proposed business;
• Whether any surplus earnings will be remitted abroad; and
• Details of any foreign personnel to be employed and details of government approval for their
employment.
Single currency domestic cash concentration is allowed, but this can only be done with all the
accounts under the same master account. Cross-border cash concentration is not allowed.
Typical local investment instruments for surplus liquidity include short-term deposits, time deposits
and notice accounts.
Outward remittance of foreign currency is highly regulated by BB and foreign exchange hedging
instruments are not available.
Corporate income tax is levied at 37.5% (for some sectors, the tax rates are slightly different). A 10%
withholding tax on interest earned and an excise duty is applied to all bank accounts. No distinction is
made between offshore and onshore accounts.
A 15% value-added tax is levied on all banking services charges/commission earned.
Market Watch
Bangladesh Bank has undertaken a project to modernise the country’s payments and clearing
system, known as the Bangladesh Automated Clearing House (BACH). BACH will be implemented
in two phases: Phase 1 - Bangladesh Automated Cheque Processing System (BACPS), and Phase 2 Bangladesh Electronic Fund Transfer Network (BEFTN). Phase 1 (BACPS) has been implemented and
went live in Bangladesh in November 2010. The main features of BACPS are the adoption of a new
cheque design standard with an MICR (Magnetic Ink Character Recognition) code line and the exchange
of cheque-image and data instead of paper cheques, for the purpose of clearing and settlement.
Phase 2 will see the implementation of Bangladesh Electronic Fund Transfer Network (BEFTN) which
will enable electronic fund transfers between accounts held with different banks. Bangladesh Bank has
not specified any timeline for BEFTN implementation, but it is expected to be completed within 2-3
years.
Tel: [880] (2) 966 0536
Tel: [880] (2) 966 0546
Market Analysis: Brunei
Overview
Population
392,000
Total Area
5,765 sq km
Capital
Bandar Seri Begawan
Major Language(s)
Malay, English, Mandarin and other Chinese Dialects
Time Zone
GMT + 8 hours
Currency
Brunei Dollar (BND)
Brunei Currency and Monetary Board and Financial Institutions
Division (regulators)
capita (2009 est.)
1.2%
Central Bank
GDP
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD6.4bn (2009)
Mineral fuels, mineral oils,
and products; apparel and
clothing accessories; energy
equipment and energyrelated machinery; aircraft,
spacecraft, and related
parts; electrical machinery
and equipment; and other
commodities (2006)
Japan - 46.81%, Korea 13.66%, Indonesia - 9.02%,
Australia - 8.91% (2009)
USD9.0bn (2009)
Imports c.i.f
Major Imports
USD2.6bn (2009)
vehicles, parts and
accessories; iron and steel;
equipment; pharmaceutical
products; and other
commodities (2006)
Major Suppliers
(% of total)
Singapore - 37.2%, Malaysia
- 19.0%, Japan - 7.0%, China
- 6.0%, Thailand - 5.0%, US 4.3%, UK - 4.1% (2009)
Brunei has no central bank. The Ministry of Finance, through the Brunei Currency and Monetary
Board and the Financial Institutions Division, exercises most of the functions of a central bank.
Brunei currently has a total of eight banks; two local and six foreign.
Market Analysis: Brunei
Account type
Local current
Local savings2
Foreign current1
Foreign savings
Resident
Yes
Yes
2
Yes
Yes3
Non-resident
Yes
Yes3
Yes2
Yes3
Credit interest
No
Yes
No
Yes3
3
3
1. Overdrafts are not permitted and cheque books are not available for foreign currency current accounts.
2. Subject to approval.
3. Statement saving accounts only.
A popular domestic payment instrument in Brunei is the cashier’s order; in the absence of a central
clearing system, the banks meet daily at the HSBC offices where these orders are exchanged.
Clearing typically takes two or three days. Cheques are also commonly used and have the same
clearing period, unless the payer and receiver use the same bank, in which case, value is same-day.
Telegraphic transfers and drafts are also available.
The manual nature of the clearing process means that an early daily cut off time of 9.30am is
necessary; any payments arriving after that time are processed on the following business day.
The Brunei Currency and Monetary Board issues Brunei’s currency and is responsible for maintaining
monetary stability, while the Financial Institutions Division acts as the principal licensing and
monitoring agency for banks and finance companies operating in Brunei.
There are few restrictions on the type of business that can be set up in Brunei. However, businesses
considered as affecting public interests directly – such as banks, finance companies, money lenders
and travel agents – must obtain special licences from the appropriate government authorities. All
companies with businesses in Brunei must be registered with the Registrar of Companies and have
a registered place of business.
Liquidity management such as notional pooling or cash concentration are not generally practised,
even on an in-country basis.
There are no exchange control laws in Brunei. Previous legislation was repealed in 2000.
Market Watch
Tel: [673] 2252 339
Tel: [673] 2252 336
Market Analysis: China
Overview
Population
1.3 billion
Total Area
9.60 million sq km
Capital
Beijing
Major Language(s)
Putonghua (Mandarin)
Time Zone
GMT + 8 hours
Currency
Renminbi (RMB)
Central Bank
GDP
The People’s Bank of China
8,734.7bn (2009 est); 8.5% real growth rate (2009 est.); 6,546 per
capita (2009 est.)
-0.06%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD1.2tr (2009)
Electrical machinery
and equipment; energy
equipment and energyrelated machinery; apparel
and clothing accessories;
furniture; and other
commodities (2009)
Imports c.i.f
Major Imports
USD1.0tr (2009)
Electrical machinery and
equipment; mineral fuels,
mineral oils, and products;
energy equipment and
ores, slag, and ash;
optical, photographic, and
measuring equipment, parts
and accessories; and other
commodities (2009)
Major Suppliers
Japan - 13.04%, Korea
US - 18.4%, Hong Kong - 10.2%, US - 7.75%,
13.8%, Japan - 8.15%, Korea (% of total)
Germany - 5.57%, Taiwan
- 4.5%, Germany - 4.15%
- 2.4%, Hong Kong - 1.0%
(2009)
(2009)
USD2.2tr (2009)
The People’s Bank of China (PBOC) is the central bank of China. Its main aim is to formulate and
implement monetary policy and to safeguard financial stability. The PBOC also regulates interbank
lending and bond markets.
The banking sector is dominated by the “Big Four” state-owned banks: Industrial and Commercial
Bank of China, China Construction Bank, Bank of China and Agricultural Bank of China. By the end
of the five-year transitional period since China’s entry to the World Trade Organization, many of the
barriers to foreign bank operations in China have been removed. With local incorporation, foreign
global banks, e.g. HSBC, Citigroup, Standard Chartered Bank and Deutsche Bank, etc. have made
significant direct investments in China.
A resident company is allowed to open one basic RMB account and, in principle, as many general
RMB accounts as they wish. General accounts cannot be used for cash withdrawal and payroll.
Types of FCY accounts: There are various regulatory requirements applicable to the opening and
operation of foreign currency (FCY) accounts. Different types of FCY accounts are opened for
different purposes, and the operation of these accounts is subject to regulatory restrictions in relation
to these specific purposes.
Foreign account types Inflows
Capital account
To receive capital
injections and capital
increases
Outflows
Payments for current
account items and
approved capital
expenditure
Current account items
and items approved by
the State Administration
for Foreign Exchange
(SAFE)
As specified in the loan
Foreign debt special
agreement, but cannot
account
be used to repay RMB
loans
Repayment of the
Foreign debt special loan Transferred from
repayment account
other FCY accounts, FCY loan principal and
or conversion from interest
RMB
To receive the loan Usage of loan is subject
FCY loan account
to loan agreement
(including loan account proceeds from
and repayment account) onshore FCY loans
by banks or through
entrusted loans
Payment of expenses
To temporarily
Foreign investment
receive funds related and anything associated
special account
with direct investment
to direct China
(applicable to foreign
in China. SAFE’s
investment
companies)
approval is required
for each payment and
conversion
Settlement account
Collections for FCY
current items (i.e.
goods-trade and / or
service-trade related
items)
To receive loan
proceeds from
overseas
Comments
In principle, only one account
can be opened with a bank
located in the same region as
the company and it is subject
to SAFE approval
No SAFE approval is required
Foreign debt registration and
SAFE approval for account
opening required
Foreign debt should be repaid
through a foreign debt special
account, unless otherwise
approved by local regulators
In principle, conversion to
RMB is not allowed unless
otherwise approved by SAFE
• One account only. SAFE’s
approval is required for
account opening
• Used for designated purpose
and every transaction requires
SAFE approval
• Unused funds can be either
transferred to respective
capital account (when
correspondent FIE is set up) or
paid out to the foreign investor.
Account type
RMB accounts
Foreign accounts
Resident
Yes
Yes
Non-resident
Yes (Upon approval by PBOC)
Yes
All resident accounts are interest bearing. Details of RMB and FCY accounts are as follows:
• RMB deposits: The ceiling interest rates are promulgated by PBOC.
• FCY deposits: The ceiling interest rates are promulgated by PBOC for short term deposits (current
account, 7 days call deposit, 1/3/6/12 months time deposit) with amount less than USD3million or
equivalent and USD, YEN, EUR or HKD as deposit currencies. Otherwise, favourable interest rates
can be offered to customers at the bank’s sole discretion.
Non-resident accounts:
• RMB deposits: Same practice as RMB resident account is applied.
• FCY deposits: The exact offered rate is at bank’s sole discretion.
Local RMB payment
The China National Advanced Payment System (CNAPS) is the main clearing system for RMB
settlement in China, which comprises a high-value payment system (HVPS) and a bulk electronic
payment system (BEPS):
• HVPS: This is a real-time gross settlement system that has covered all cities in China since June
2005. Payments made via HVPS between the banks with direct membership can take a few
seconds or minutes, regardless of their geographic locations. CNAPS HVPS has become the most
popular and important clearing channel in China. There is no amount limit via HVPS.
• BEPS: This is a low-value clearing system (similar to an automated clearing house or general
interbank recurring order) that has been implemented throughout China since 2006. It uses the
CNAPS architecture and caters to ordinary credit and debit transactions as well as bulk payments
and collection processing with transaction amount no more than CNY50,000. As with HVPS, BEPS
caters to both in-city and cross-city transactions.
In-city local clearing systems – HSBC also has membership of most of the local clearing systems
where it has a presence. Hence, HSBC can provide customers with access to the in-city clearing
houses to facilitate efficient in-city clearing. This is particularly crucial if the customer has a lot of incity payments/collections.
In China, there are numerous instruments that can be used for in-city and cross-city payments, as
well as underlying clearing mechanisms that will determine how quickly and efficiently funds will be
credited to recipients’ bank accounts.
RMB payment
In-city
Priority
Low
High
Cross-city
Low
Low / High
Amount
<=CNY50K
Selected channel
BEPS / Local clearing system
Any Amount
Local clearing system
Any Amount
HVPS
<=CNY50K
BEPS
Any Amount
Bank Draft
Any Amount
HVPS
RMB cross-border payment
RMB Payment
Outward Payment
Inward Collection
Destination
To overseas account
Selected Channel
Telegraphic Transfer
To domestic account
CNAPS - HVPS
From overseas account
Telegraphic Transfer
From domestic account
CNAPS - HVPS
International and domestic FCY payment
For international and domestic FCY payments, the following clearing channels are available for
payments in China.
FCY payment
Overseas
Cross-city
In-city
In-city real-time
gross settlement
Currency
Australian dollar,
Canadian dollar, Danish
kroner, Euro, Hong Kong
dollar, Singapore dollar,
Sterling, Swedish krona,
Swiss franc, US dollar,
Japanese yen, Malaysia
Ringgit, and Norwegian
krona
Australian dollar,
Canadian dollar, Danish
kroner, Euro, Hong
Kong dollar, Singapore
dollar, Sterling, Swedish
krona, Swiss franc, US
dollar and Japanese yen,
Malaysia Ringgit, and
Norwegian krona
Hong Kong dollar and
US dollar
Australian dollar,
Canadian dollar, Euro,
Singapore dollar, Sterling
and Japanese yen
Other currency
Hong Kong dollar and
US dollar
FCY real-time
gross settlement
– Shenzhen only
No
Telegraphic
transfer
Yes
Agent bank
clearing
No
Yes
Australian dollar, No
Euro, Canadian
dollar, Hong Kong
dollar, Singapore
dollar, Sterling,
US dollar and
Japanese yen
Yes
Yes
No
Yes
Yes
No
Yes
No
No
No
No
No
The China Banking Regulatory Commission (CBRC) formulates supervisory rules and regulations
governing banking institutions, while the State Administration of Foreign Exchange (SAFE) is the
government bureau in charge of China’s balance of payments and foreign exchange positions.
Direct inter-company financing is strictly prohibited in China while Entrusted Loan is the only
instrument available to facilitate indirect inter-company financing. Essentially, entrusted loan is a
mechanism whereby a Chinese legal entity can borrow / lend money from / to another Chinese
legal entity, through a financial institution as an intermediary. Entrusted loan is a main foundation for
building up the domestic cash concentration solution.
Places deposits
Entrusting party
Agent bank
EL repayment
Onward lends
Borrower
Inward remittance
The practice of planning and managing working capital domestically through RMB cash concentration
techniques has been widely accepted. The focus of concentration has changed from the traditional
needs of concentrating all cash positions at pool header to how to efficiently utilise internal cash
while minimising potential tax liabilities.
Domestic FCY cash concentration solution, which shares the same mechanism as RMB pair has
become more focused recently and requirements have been relaxed rapidly, especially since new
regulations promulgated by SAFE in 2009. Unlike the RMB pair, domestic FCY cash concentration is
subject to SAFE approval.
Key cash concentration tax considerations include:
• Stamp duty: In a cash concentration agreement, the pool header company sets up a revolving
credit facility for a bilateral entrusted loan relationship with each subsidiary. The borrower (the pool
header company or subsidiaries) can borrow or lend as much as it wishes as long as the amount is
within the revolving credit facility during the prescribed period. All participants, including commercial
banks, pay stamp duty according to the amount of the revolving credit facility at the time the cash
concentration master agreement was signed. The current domestic stamp duty for such contracts is
0.005%.
• Business tax: In cash concentration, there are typically deposits and withdrawals of the entrusted
loans taking place every day between the pool header company and subsidiaries. Business tax is
normally 5% with surtax of 0.05% to 0.10% levied on entrusted loan interest income.
• Corporate income tax: Any interest earned from an entrusted loan involved in cash concentration is
subject to corporate income tax which is standardized at 25% throughout the country. On the other
side, the interest cost due to the entrusted loan may not be deducted from taxable income if the ratio
of affiliate loan to owners’ equity exceeds the prescribed limit which is stipulated in Article 46 of the
Corporate Income Tax Law of China. As of now, the limit is set as 5 for financial institutions (FI) and 2
for non-FI corporates.
Apart from the tax mentioned above, other tax considerations:
• A Chinese resident company is liable for income tax on its worldwide income. Non-residents are
liable for income tax on Chinese-sourced income.
• Information on loans, interest and related expenses has to be disclosed and reported when filing
annual tax returns.
• Withholding income tax is imposed at 10% for non-resident companies, unless a double tax treaty
offers a lower tax rate.
Cash repatriation from China
SAFE eases restrictions on Offshore Lending
• Aimed at encouraging enterprises set up in China with capital strength to make additional
investments offshore
• Eligible companies may extend FX loans to offshore borrowers via direct lending or entrusted loans
• Reduces the requirements for offshore lending, expands sources of funds, and simplifies
verification and remittance of offshore lending
Applicable SAFE regulations
Domestic Lender
Overseas Borrower
SAFE Regulation No. 24 issued SAFE Shanghai Regulation No.
on 9 June 2009
32 issued on 8 March 2010
Incorporated in China
Member of foreign invested MNC
group and registered in Shanghai
Pudong New District
Subsidiaries or joint-stock
Member of same MNC group
enterprises of Domestic Lender (e.g. parent of Domestic Lender
or affiliate companies)
Traditional cash repatriation method from China in accordance with different business types:
Key documentation
required
Dividend
• Audit report
Repatriation
• Capital Verification
Report
• Board resolution for
dividend declaration
• Corporate income tax
duly paid
• Service agreement
Service Fees (not
relating to intangible Invoice
• Tax clearance certificate
assests)
Repayment of
Shareholder Loan
Trade between
Overseas and PRC
entity
Other considerations
• With distributable profits
• Registered capital paid
on time
• Prior year losses set off
• Last year’s Interim
dividend possible but not
common
• Registration of
agreement normally not
required
• Clearance with tax
bureaus required
• Management fee may
not be tax deductible
• SAFE approval for
• Loan agreement
repayment of loan principal
registered with SAFE
• SAFE approval for loan and interest required
• Loan repayment should
repayment
• Tax clearance certificate abide by terms of loan
agreement
for loan interest
• Sales and purchase
agreement
• Customs declaration
documents
• Other supporting
documents required by
SAFE per business type
Registered in the list of
“Eligible customers for
outward payment due to
import business”.
Frequency
Once a year (or twice at
most)
No restriction
In accordance with
relevant terms of loan
agreement
No restriction
• Licensing agreement
Invoice
• Approval or registration
certificate issued by PRC
authorities
•Tax clearance certificate
Capital Reduction
• Board resolutions
• Approval from original
approval authorities
•SAFE approval notice
Offshore Lending
• Loan agreement
• SAFE approval notice
• Registration with relevant No restriction
authorities required
• Special audit report
on the sales amount is
required if the royalty
is related to sales
commission
• Charging basis and
payment terms acceptable
to approval and tax
authorities
• Cash to extract is capped N/A
under paid-up registered
capital
• Registered capital after
reduction cannot be lower
than statutory minimum
• Resistance from local
government
• Need to notify creditors
and announce publicly
Subject to local SAFE
approval
N/A
Market Watch
The following SAFE regulations came into effect in 2009:
• Regulation 24 (Circular No: Huifa [2009] 24): Under this regulation, qualified domestic enterprises
can establish direct inter-company lending with their legally established overseas wholly owned
subsidiaries or invested companies. This circular also expands capital sources available to domestic
enterprises for overseas lending, by permitting these enterprises to use their own foreign exchange,
RMB-purchased foreign exchange or SAFE-approved FCY cash pools for cross-border lending
within specified limits. This new regulation has several purposes including: facilitation and support of
domestic enterprises that are using and operating foreign exchange funds, and to promote efficient
capital usage by these firms; expansion of financing channels for overseas enterprises; improvement
of statistical monitoring and risk precaution mechanisms for overseas lending; and promotion of the
“going out” overseas expansion strategy for domestic enterprises.
• SAFE Regulation 29 (Circular No: Huifa [2009] 29): Under this regulation, SAFE allows all qualified
local banks and foreign-invested banks to open domestic foreign exchange accounts for overseas
institutions. Previously, only foreign-invested banks and selected local banks opened offshore
accounts for overseas institutions. The new regulation has intensified and promoted strong
competition.
• Regulation 49 (Circular No: Huifa [2009] 49): Under this regulation, qualified domestic enterprises
can establish domestic foreign currency cash concentration on top of the entrusted loan framework.
Any setup of FCY cash concentration service is subject to SAFE approval.
In April 2009, it was announced that five mainland cities (Shanghai, Guangzhou, Shenzhen, Zhuhai
and Dongguan) and around 400 companies could participate in the pilot project that allows RMB to
be used in cross-border trade payments. Participating firms can benefit from reduced costs and risk
associated with FCY exchange. The project is viewed as a first step towards the internationalisation
Royalty Payments/
Technical Service
Fees
of the RMB. In June 2010, this scheme was further expanded to 20 pilot cities and provinces (Beijing,
Tianjin, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Shanghai, Jiangsu, Zhejiang, Fujian, Shandong,
Hubei, Guangdong, Guangxi, Hainan, Chongqing, Sichuang, Yunnan, Xizang and Xinjiang), and
restrictions on overseas counter-party countries and regions were also removed.
In August 2010, SAFE issued a Circular which allows selected enterprises in Beijing, Guangdong
(including Shenzhen), Shandong (including Qingdao) and Jiangsu to keep export proceeds in
overseas bank accounts. In each province/city, up to 10 enterprises will be allowed to participate in
the scheme. Selected enterprises can open export proceeds accounts in banks registered in foreign
countries (including Hong Kong, Macau and Taiwan). The pilot test began on 1 Oct 2010 and will last
for one year.
Tel: [86] (21) 3888 1811
Tel: [86] (21) 3888 1600
Market Analysis: Hong Kong SAR
Overview
Population
7.0 million
Total Area
1,104 sq km
Capital
n/a
Major Language(s)
Cantonese and English
Time Zone
GMT + 8 hours
Currency
Hong Kong Dollar (HKD)
Central Bank
GDP
Hong Kong Monetary Authority (regulator)
300.8bn (2009 est); -3.6% real growth rate (2009 est.); 42,574 per
capita (2009 est.)
-1.0%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
USD318.8bn (2009)
equipment and energyrelated machinery; jewels,
jewellery and precious
metals; toys, games and
sports equipment, parts and
accessories; apparel and
clothing accessories; and
China - 51.2%, US - 11.6%,
Japan - 4.4% (2009)
Total Trade
USD666.4bn (2009)
Imports c.i.f
Major Imports
USD347.7bn (2009)
equipment and energyrelated machinery; jewels,
metals; toys, games and
sports equipment, parts and
accessories; plastics and
plastic articles; and other
commodities (2009)
Major Suppliers
China - 46.4%, Japan - 8.8%,
(% of total)
Singapore - 6.5%, US - 5.3%
Taiwan - 0.3%(2009)
The Hong Kong Monetary Authority (HKMA) is the government authority in the Hong Kong Special
Administrative Region (SAR) responsible for maintaining banking and monetary stability.
Hong Kong has one of the highest concentrations of banking institutions in the world; 69 of the
100 largest banks globally have operations there. As of October 2010, there were 196 authorised
institutions operating in Hong Kong.
Account type
Local current1
Local savings
Foreign current1
Foreign savings
Resident
Yes
Yes
Yes
Yes
Non-resident
Yes
Yes
Yes
Yes
Credit interest
No
Yes
No
Yes
1
1
1. US dollar (USD) and Renminbi (RMB) cheque books are available.
There are three payment settlement types operating within the local clearing environment: real-time
gross settlement (RTGS) payments, paper cheque clearing and electronic clearing.
Clearing system
Comments
RTGS payments:
• Clearing House Automated Transfer System (CHATS) payments
HKD, USD, euro (EUR) and RMB are interbank electronic payments settled on a RTGS basis, i.e. as
opposed to end-of-day net settlement.
• RTGS provides payment-versus-payment (PVP) settlement for
foreign exchange trades to mitigate settlement risk. PVP settlement
currencies include HKD, USD, EUR and RMB, and also between
USD and ringgit, USD and Indonesian rupiah.
• CHATS is operated by Hong Kong Interbank Clearing Ltd (HKICL), a
company jointly owned by the HKMA and the HKAB.
Paper cheque clearing:
Cheque image presentation for clearing is used for cheques below
HKD, USD and RMB
HKD100,000. Settlement of cheques is on a D+1 basis. (D being the
cheque deposit date). In Hong Kong, cheque clearing is available for
HKD, USD and RMB cheques.
Electronic Clearing
• Introduction of additional settlement for autocredit by HKICL in
November 2009.
• In September 2010 RMB CCASS settlement was implemented
in the local RMB Clearing ready to support settlement of RMBdenominated securities.
Cross-border clearing
• In March 2009, the Hong Kong RTGS system established a crossborder linkage arrangement with mainland China for two-way crossborder RTGS settlement of HKD, USD and EUR.
• Two-way cross-border cheque clearing is available between Hong
Kong and Guangdong/Shenzhen in mainland China. Between Hong
Kong/Guangdong, the service applies to HKD and USD cheques, and
for Hong Kong/Shenzhen for USD cheques only.
• One-way clearing of RMB cheques is available for cheques drawn
on banks in Hong Kong and presented to banks in Guangdong
province, including Shenzhen. Also available is one-way clearing for
HKD cheques drawn on banks in Hong Kong and presented to banks
in Macau.
English common law and rules of equity form the basis of the legal system in Hong Kong. As specified in
the Basic Law, the common law, rules of equity, ordinances, subordinate legislation and customary law
previously in force before July 1997 have remained unchanged, except for any that contravene the Basic
Law, and are subject to any future amendment by the legislature of the Hong Kong SAR.
Hong Kong is relatively relaxed in terms of regulation of liquidity management: single currency, multicurrency, cash concentration and notional pooling are all permitted. There are no restrictions on
foreign exchange and currency movements.
However, careful tax efficiency considerations should be reviewed, with particular regard to the
physical movement of funds among legal entities with onshore accounts. Due to the absence of
withholding tax in Hong Kong’s taxation frameworks, inter-company interest income sourced from
an onshore account may be taxable and interest payments may not be tax deductible. As a result,
cross-border movement of funds with offshore legal entities is generally preferable, as the receipt
of interest income offshore is not likely to be subject to tax. (Obtaining independent advice on the
accounting, tax, and legal consequences of entering into any liquidity management arrangement is
recommended.)
The standard rate of corporate profits tax is currently 16.5%.
Popular investment instruments for short-term HKD liquidity are time deposits and money market
savings accounts.
Market Watch
Momentous developments for the cross-border renminbi trade settlement scheme launched in July
2009. In June 2010, People’s Bank of China (PBoC) expanded the mainland locations covered by the
scheme to 20 provinces and cities. Also, the other leg of the cross-border trade is no longer restricted
to Hong Kong, Macau and Association of Southeast Asian Nation (ASEAN) countries, but extended
to the rest of the world. Following this expansion, on 19 July 2010 the Hong Kong Monetary
Authority signed a supplementary memorandum of co-operation with PBoC on the expansion of
the RMB trade settlement pilot scheme and the Settlement Agreement on the Clearing of RMB
Business was also revised accordingly. This in effect removed the last restrictions on Hong Kong’s
renminbi inter-bank market, creating a new platform for renminbi investment product development
and consolidating Hong Kong’s role as a renminbi offshore clearing centre.
Following the initial launch of the SWIFTNet migration project in May 2009, which allows banks
to use SWIFT messages for payment instructions on the SWIFTNet platform, the second phase
of the project covered the migration of the interactive user interfaces for account enquiry and
reporting functions to the SWIFTNet platform in July 2010. The whole implementation increases
the efficiency of participating banks, as it enhances interoperability between Hong Kong’s domestic
RTGS systems and the global platform. It also helps in attracting overseas financial institutions to use
Hong Kong’s RTGS systems with its more open and convenient access.
Other local clearing developments include:
• Since 25 December 2009, the RTGS service for USD, EUR and RMB operates on Hong Kong
public holidays falling on Monday to Friday, except 1 January. The objective is to serve international
settlement and further strengthen Hong Kong’s position as an international financial centre.
• In addition, there are ongoing discussions between the HKMA and the central banks of other
countries/regions (including the Middle East and various East Asian countries) regarding the feasibility
of establishing links between the RTGS systems of these countries to facilitate settlement activities
across the region.
• HKICL will launch an initiative in early 2011 in which all member banks will use Direct Debit
Authorisation Exchange (DDAE) to exchange DDA instructions by file transfer via HKICL instead of
delivery of hard copy reports between member banks. The effective date of this initiative was 10 Jan
2010 and it can be foreseen that the security and operational efficiency of DDA information exchange
between member banks will be improved significantly.
• HKICL will also implement the RMB Autodebit and Autocredit System, adopting a cloning approach
to replicate the functionalities of the existing Autopay System in HKD.The launch date of the RMB
Autodebit and Autocredit service is 21 March 2011.
Tel: [852] 2822 4633
Tel: [852] 2192 2233
Market Analysis: India
Overview
Population
1.2 billion
Total Area
3.29 million sq km
Capital
New Delhi
Major Language(s)
Hindi and English, with more than 20 other official languages
Time Zone
GMT + 5.5 hours (New Delhi)
Currency
Indian Rupee (INR)
Central Bank
GDP
Reserve Bank of India (RBI)
3,528.6bn (2009 est.); 5.4% real growth rate (2009 est.); 2,932 per
capita (2009 est.)
8.7%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
USD165.2bn (2009)
Jewels, jewellery and
precious metals; mineral
fuels, mineral oils, and
products; electrical
machinery and equipment;
and other commodities
(2009)
UAE - 12.5%, US - 11.1%,
China - 6.2% (2009)
Total Trade
USD422.9bn (2009)
Imports c.i.f
Major Imports
USD257.7bn (2009)
and products; jewels,
metals; electrical machinery
equipment and energyrelated machinery; organic
chemicals; and other
commodities (2009)
Major Suppliers
China - 11.2%, US - 6.5%,
(% of total)
UAE - 6.0%, Saudi Arabia
- 5.7%, Australia - 4.2%,
Germany - 4.2%, Singapore 2.4% (2009)
The Reserve Bank of India (RBI) is the central bank of India and the main regulator for banks. India’s
commercial banking sector is made up of public-sector banks including the State Bank of India group
and 20 other nationalised banks, private-sector banks and foreign banks. Although the public-sector
banks have a large network of branches, the Indian private-sector banks are fast catching up in terms
of revenue, size and business growth.
Customers who are not incorporated in India and have branches, liaison or project offices in India, are
regulated by Section 6(3)(i) of the Foreign Exchange Management Act 1999. These companies with
approval from the RBI can open a bank account in India.
At the time of opening of the bank account, the account holder is required to furnish an undertaking
to the authorised dealer that debits to the account are for the purpose of investments in India, and
credits representing sale proceeds of investments will be in accordance with RBI regulations.
Account type
Local current
Foreign current
Resident
Yes
Yes
Non-resident
Yes
Yes
Electronic clearing systems
Real-Time Gross Settlement
(RTGS)
Comments
• Electronic payments instructions are processed in real time and
on a gross basis.
• Intended for systemically important payments, such as treasury,
inter-bank, statutory and high value customer payments.
• Provides deal-by-deal instant settlement and continuous gross
settlement without netting.
• Minimum amount permitted for transfer is INR100,000.
• Credit is received within two hours of transaction.
• More than 70,000 branches enabled on RTGS.
National Electronic Funds Transfer • NEFT is an electronic funds transfer system between banks
(NEFT)
using the SFMS (Structured Financial Messaging Solution)
messaging application.
• Intended for day-to-day payment requirements of customers,
such as payment to suppliers.
• Runs on a centralised clearing and settlement system supported
by the RBI and is aimed as a substitute for cheque payments.
• More than 70,000 branches enabled on NEFT.
• Enables large-volume transfers of small-value transactions.
National/Electronic Clearing
• Intended for salary, interest, dividend, commission and other bulk
Service
repetitive payments.
(N/ECS)
• Institutions and corporations disbursing interest or dividends to
their investors use this payment mode.
• Works on a one-day cycle.
• Transaction details and settlement details are captured on
diskettes for data transfer.
• More than 48,000 branches enabled on NECS.
Cheques remain the most common method of payment in India. Currently there are 1,149 local
clearing houses across the country, with those in Indian metropolitan areas being controlled by the
central bank, while clearing in non-metropolitan areas and smaller towns is usually run by stateowned banks.
Historically, the clearing systems have been local and confined to a defined jurisdiction covering all
the banks situated in the area under a particular zone. However, with the introduction of the Speed
Clearing Service and the cheque truncation system, clearing houses are now empowered to process
instruments from other jurisdictions and areas.
In addition, regulators are encouraging electronic payments through NEFT, RTGS and ECS, as well as
direct debits and direct credits.
Apart from the RBI, other important regulatory bodies in India include:
• The Securities Exchange Board of India (SEBI), which regulates capital market activities;
• The Central Board of Excise and Customs;
• The Central Board of Direct Taxes, which provides essential inputs for policy and planning of
direct taxes in India, and is responsible for administration of direct tax laws through the Income Tax
Department; and
• The Insurance Regulatory and Development Authority (IRDA), which regulates the insurance
industry.
Requirements for establishing a company in India are governed by the Companies Act, 1956. Among
others, the key requirements include the following provisions:
• Private companies should have a minimum paid-up capital of INR100,000 or such higher paidup capital as may be prescribed. A public company should have a minimum paid-up capital of
INR500,000 or such higher paid-up capital as may be prescribed. Please note that exact capital
requirements vary according to industry sector.
• A company may be formed by any seven or more persons (in the case of a private company any
two or more persons) by subscribing their names to a memorandum of association and otherwise
complying with the requirements of the Companies Act as regards registration.
• No company shall be registered by a name which, in the opinion of the central government, is
undesirable. A name which is identical with or too nearly resembles the name by which a company
in existence has been previously registered or a registered trade mark, or a trade mark which is
subject of an application for registration, of any other person under the Trade Marks Act, 1999 may
be deemed to be undesirable by the central government.
• As regards the incorporation of a subsidiary company in India of a foreign company, the usual
provisions of the Companies Act apply as regards incorporation and other day-to-day corporate
matters. However, investment in India by a foreign company by way of incorporating a subsidiary
must also comply with the government’s current foreign direct investment policy and other regulatory
requirements.
Under the provisions of the Foreign Exchange Management Act, 1999, foreign companies in India
are authorised to remit profits, royalties, dividends and capital, subject to foreign exchange controls
administered by the RBI. Remittances are permitted only after accounts have been audited and due
taxes have been paid. Foreign exchange hedging is not permitted and deposits in foreign currency
are restricted by the central bank.
Only single currency cash concentration is allowed in India and in a cash concentration structure
interest payable by one participating company to another is subject to withholding income tax.
Cash concentration across legal entities (pool vs main) can trigger significant tax implications, based
on legal status and holding structure of the participating entities. Any advance or loan given by a
closely held company to either its shareholder(s) holding 10% or more of the voting power or any
other company in which such shareholder(s) has substantial interest, is assumed as taxable dividends
in the hands of the receiving company to the extent the lending company possesses accumulated
profits. Two relevant exceptions to this rule are:
• Where lending forms a substantial part of the lending company’s business;
• Where the lending company is a listed company or is a subsidiary of a listed company.
Tax deductibility of the cost of funds for the lending company may be impacted where it is utilised
to fund other group entities. Also, interest payable between such group companies will be subject
to withholding tax at 20% (plus surcharge and cess as applicable) on a gross basis, which will create
cash flow gaps. Interest income arising from the pooling will be taxable at 30% (plus surcharge and
cess as applicable). If any of the lending entities are on an income-tax holiday, such interest income
may not be covered by the holiday.
Notional pooling is not permitted in India.
Common investment instruments used by corporates for surplus liquidity include term deposits,
cluster deposits, and mutual funds. (The previous alternative of exchange earner’s foreign currency
(EEFC) deposits ceased to exist as of 31 October 2008.)
Corporate tax rates are as follows:
Company
Domestic
company
Foreign
company
Regular tax
(a) Where total income is more than INR10m
(b) Where the total income is equal to or less than
INR10m
(a) Where total income is more than INR10m
(b) Where the total income is equal to or less than
INR10m
Tax rate (inclusive of
applicable surcharge and
cess )
33.2175%
30.90%
42.23%
41.20%
Withholding tax rates for foreign companies (subject to surcharges and cess wherever applicable) are
as follows:
Source of
income
Dividends
Interest
income
Royalties
Withholding tax rate for
non-treaty foreign companies
Dividends referred to in Section
1150 of the Income Tax Act are
exempt. Any income received in
respect of units of a mutual fund
specified under Section 10(23D)
or the specified company is also
exempt. In other cases the rate is
20%.
20% on money borrowed in foreign
currency.
10% where the agreement is
made on or after 1 June 2005. For
agreements made prior to 1 June
2005, there are different rates
depending on the date when the
agreement was made.
Withholding tax rates for US companies
carrying out business in India under the
India–US tax treaty
15% if at least 10% of the voting stock of the
company paying the dividend is held by the recipient.
In other cases, the rate is 25%.
10% if the loan is granted by a bank or similar
financial institution, including insurance company. In
other cases, the rate is 15%.
10% for equipment rental and for ancillary or
subsidiary services thereto. In other cases, 15%.
Other
income
10% where the agreement is
made on or after 1 June 2005. For
agreements made prior to 1 June
2005, there are different rates
depending on the date when the
agreement was made.
40%, plus surcharge and cess as
applicable.
10% for equipment rental and for ancillary or
subsidiary services thereto. In other cases, 15%.
Nil if treaty benefit is available. Otherwise, the tax
rate is 40%, plus surcharge and cess as applicable.
Market Watch
India is undergoing significant changes and improvements to its clearing infrastructure. Some major
developments and initiatives include:
Increased use of electronic clearing systems, with significant growth in the use of NEFT and RTGS:
In line with the RBI’s vision for an increased role for electronic payments in India, the RBI is upgrading
and promoting electronic payments systems. This is evident in the percentage growth in the volume
and value of electronic payments compared to paper payments, as shown below.
Year-on-year growth
Paper volume
Paper value
Electronic volume
Electronic value
2004–05
14%
–10%
37%
109%
2005–06
10%
8%
25%
35%
2006–07
6%
6%
33%
61%
2007–08
7%
11%
41%
342%
2008–09
–5%
–5%
25%
38%
2009–10
-2%
-17%
10%
65%
Source: RBI web site
Phasing out of paper-based high-value clearing: RBI discontinued High Value Clearing in March 31,
2010. Statutory payments, such as direct and service tax, excise and customs duty, are already
required to be made electronically.
Cheque truncation system: Under the cheque truncation system, instead of the physical instrument,
an electronic image of the cheque is sent to the drawee branch along with the relevant chequerelated information. This effectively reduces the turnaround time for the processing of cheques, along
with the associated cost of transit and delay in processing, etc. and speeds up the process of cheque
realisation. A pilot scheme for the system is currently underway in the National Capital Region (New
Delhi and four surrounding states).
Tel: [91] (22) 6669 6301
Tel: [91] (22) 6746 5517
Technical
services
Market Analysis: Indonesia
Overview
Population
227.3 million
Total Area
1.90 million sq km
Capital
Jakarta
Bahasa Indonesia (official), Dutch, English and 300 regional
languages
GMT + 7 hours (West); GMT + 8 hours (Central); GMT + 9 hours
(East)
Indonesian Rupiah (IDR)
Major Language(s)
Time Zone
Currency
Central Bank
GDP
Bank Indonesia
capita (2009 est.)
5%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD117.0bn (2009)
Mineral fuels, mineral
oils, and products; animal,
vegetable fats and oils;
electrical machinery
and equipment; ores,
slag and ash; rubber and
rubber articles; and other
commodities (2009)
Japan - 16.0%, Singapore
- 8.8%, US - 9.4%, China 9.9%, Korea - 7.0%, India 6.4%,Malaysia - 5.9% (2009)
USD213.5bn (2009)
Imports c.i.f
Major Imports
USD97.0bn (2009)
oils, and products; energy
equipment and energyrelated machinery; electrical
iron and steel; organic
chemicals; and other
commodities (2009)
Major Suppliers
Singapore - 16.04%, China
(% of total)
- 14.4%, Japan - 10.2%, US
- 7.3%, Malaysia - 5.9%,
Korea - 4.9%, Thailand 4.8% (2009)
The central bank is Bank Indonesia (BI), whose position is regulated by statute. As a public legal
entity, BI has the authority to issue policy rules and regulations; while as a civil legal entity, BI is able
to represent itself in and outside the court of law.
There are 122 banks with more than 13,000 branches in Indonesia. These consist of state-owned
banks, local private banks (foreign exchange licensed, and non-foreign exchange licensed banks),
foreign banks and the regional development bank or Bank Pembangunan Daerah.
Type of
corporate
entity
Resident
Non-interest bearing
current account
Foreign
IDR
currency
No
Yes
Non-resident No
Yes
Interest-bearing current
account
Foreign
Savings
Credit
IDR
currency
account
facility
Yes
Yes
Not applicable Yes
Yes
Yes
Not applicable No
Foreign companies can open IDR current accounts.
Domestic funds transfer
Low-value funds transfer via Sistem Kliring Nasional (SKN): On 22 July 2005, BI introduced the SKN
national clearing system for low-value payments (below IDR 100m) which runs on a net settlement
system basis with two settlement cycles daily. SKN enables voucherless or electronic clearing
by connecting all the clearing operators in Indonesia with BI’s headquarters. Starting 2Q10, to
further improve the clearing process efficiency, BI enhanced the SKN system which enables banks
to monitor their balance position at BI in real-time. This enhancement allows BI to perform SKN
transactions settlement from banks on almost a real-time basis from the previous two settlement
cycles daily.
High-value funds transfer via the real-time gross settlement (RTGS) system: The RTGS system
allows for real-time high-value IDR funds transfer between banks in Indonesia. All fund transfers
above IDR100m are made via RTGS. RTGS is centralised at BI’s headquarters in Jakarta. Banks
whose headquarters are located in Jakarta have the option of registering as direct members of
RTGS. For banks whose headquarters are located outside Jakarta or banks that are not registered as
a direct member, access to RTGS is via a correspondent bank with direct RTGS membership.
Domestic cheque clearing
Inter-city clearing: There are 55 banks registered as direct members of the inter-city clearing scheme,
which was introduced by BI in 2002 to shorten cheque collection times. Inter-city clearing enables
registered bank members to clear cheques issued by any registered member via its headquarters,
regardless of whether the cheque instrument itself was issued by one of its remote branches.
Corporate customers receiving upcountry cheques on a regular basis will have the cleared funds
credited to their corporate account (if the issuing bank is a registered member of inter-city clearing)
one day after the clearing date. Therefore, cheques issued and deposited to a bank branch that is
a direct member of inter-city clearing will be processed on a local clearing basis, thereby making
cleared funds available to accounts more quickly.
Upcountry cheque clearing – Inkaso: Cheques issued by non members of inter-city clearing must be
cleared in the same city as the issuing branch, which has been designated as an upcountry cheque
collection (Inkaso) processing centre. The processing of upcountry cheques should take a maximum
of 27 working days.
Apart from BI, there are several other regulatory bodies which have influence over the banking
system. The Indonesian Capital Market and Financial Institution Agency (Badan Pengawas Pasar
Modal dan Lembaga Keuangan – BAPEPAM–LK) and Indonesia Stock Exchange also have a
significant regulatory role, particularly in relation to the settlement of marketable securities and
related accounts.
An Indonesian limited liability company is established by two or more parties in a notarial deed and
obtains its legal entity status after approval by the Minister of Laws and Human Rights. The minimum
authorised capital is IDR50m, of which 25% has to be paid when submitting an application.
Any company with foreign investment participation has to obtain approval from the Indonesian
Coordinating Board (Badan Koordinasi Penanaman Modal – BKPM). The government has in force a
prohibition list that prevents certain types of business from being owned by foreign corporations.
In 2004, the Indonesia Deposit Insurance Corporation (Lembaga Penjamin Simpanan (LPS)) was
established and is responsible for insuring all depositors’ funds. The LPS determine from time to time
the maximum amount secured under this deposit insurance scheme.
IDR currency may not be remitted outside Indonesia.
IDR transfer to non-resident accounts is restricted unless there is valid underlying economic activity.
For amounts up to IDR500m in a day, the underlying economic reasons must be stated in the fund
transfer; for amounts above IDR500m, proof of documentation must be supplied in support of the
underlying economic reasons in Indonesia.
Resident and non-resident account holders are required to fill in a code for central bank foreign
exchange monitoring purposes for any foreign currency (FCY) transfer with a value equal to or greater
than USD10,000.
Under BI Regulation Number: 10/28/PBI/2008, the following regulations regarding foreign exchange
purchase transactions apply:
• Purchases of FCY against IDR by a resident/non-resident of a value not exceeding USD100,000
should be accompanied with a formal declaration with stamp duty signed, stating that the foreign
exchange purchase transaction against IDR does not exceed USD100,000 or its equivalent per
month across all banks in Indonesia.
• For purchases of FCY against IDR above USD100,000 or its equivalent per month across all banks
in Indonesia, the following documents should be submitted:
– Copy of tax identity (this does not apply for non-residents); and
– Documents evidencing the underlying transaction.
Banks are only permitted to conduct foreign exchange derivative transactions of FCY against IDR to
non-residents of up to USD1m or equivalent per individual transaction and each bank’s outstanding
gross position, unless those transactions are conducted for hedging purposes as part of an
investment in Indonesia with a time frame of no less than three months, merchandise exports and
imports by means of a letter of credit, and/or domestic trade by means of domestic letter of credit
(where supporting documents are required). Derivative transactions are restricted to forwards, swaps
and options.
Non-residents are not entitled to credit facilities in local currency and/or FCY. However, this restriction
is not applicable to the following:
• Syndicated credit, with conditions that the lead bank is a prime bank, credit is being extended
for project financing in the real sector for productive ventures in Indonesia, and the contribution of
foreign banks acting as syndicate members is greater than the contribution of domestic banks;
• Credit cards and consumer loans;
• Intra-day overdraft in IDR and FCY, with the condition that it is supported by authenticated
documents showing confirmation of same-day incoming remittances; and
• IDR and FCY overdraft liable to administrative charges negotiated by foreign parties of claims from
the agency appointed by the government for the management of bank assets within the framework
of Indonesian bank restructuring, for which payment is guaranteed by a prime bank.
Notional pooling is permitted, however its use is not widespread.
Time deposits are the most commonly used instrument for the investment of short-term surplus
liquidity, although treasury bills are also used. Government bonds (and, to a lesser extent, mutual
funds) are used for longer dated liquidity. Most liquidity is at the short end of the curve, typically
between one to three months.
Interest is subject to withholding tax of 20% or a lower applicable tax treaty rate.
Starting July 2009, settlement of tax payments through Bank Persepsi, which were previously
performed twice a week by banks, changed to same-day settlement. For late settlement, banks will
be penalised 1% daily of the total tax payment value collected.
On 3rd of September 2010, BI rolled out a new RRR-LDR tie-up policy in which banks have a grace
period of half a year till 1 March 2011 to keep their loan-to-deposit ratios within the 78-100% band.
Banks which abide by this will then enjoy a 2.5 ppt “rebate” on the reserve requirement ratio.
Starting 1st of November 2010, the primary reserve requirements, whereby banks have to deposit
cash amounts with the central bank increased from 5% to 8%. The secondary reserve requirement,
which banks can fulfill in the form of government bonds, remains unchanged at 2.5%.
Market Watch
In general, it is advisable to hold discussions with the central bank and the tax authorities before
embarking on any notional pooling schemes, or at the very least solicit an opinion from a suitable advisor.
Tel: [62] (21) 524 6297
Tel: [62] (21) 524 6689
Market Analysis: Japan
Overview
Population
127.3 million
Total Area
377,930 sq km
Capital
Tokyo
Major Language(s)
Japanese
Time Zone
GMT + 9 hours
Currency
Yen (JPY)
Central Bank
GDP
Bank of Japan (BOJ)
4,186.7bn (2009 est.); -5.4% real growth rate (2009 est.); 32,116
-1.1%
Trade
Exports f.o.b
Major Exports
USD581.6bn (2009)
Imports c.i.f
Major Imports
equipment; vehicles,
commodities (2009)
USD551.9bn (2009)
and products; electrical
ores, slag and ash; optical,
photographic, and measuring
equipment, parts and
accessories; and other
commodities (2009)
Major Suppliers
China - 22.2%, US - 11.0%,
(% of total)
Australia - 6.3%, Saudi
Arabia - 5.3%, UAE - 4.1%,
Korea - 4.0%, Indonesia 4.0% (2009)
Major Markets
(% of total)
China - 18.9%, US - 16.4%,
Korea - 8.1%, Hong Kong 5.5% (2009)
Total Trade
USD1.1tr(2009)
The central bank is the Bank of Japan (BOJ), which controls monetary policy. There are approximately
650 banks in Japan, including 60 foreign banks.
Account type
Local current
Local savings
Foreign current1
Foreign savings
Resident
Yes
Yes
Yes
Yes
Non-resident
Yes
Yes
Yes
Yes
Credit interest
No
Yes
No
Yes
1. Foreign currency cheque books are not available in Japan.
Account opening procedures for non-resident companies are broadly the same as for local
companies. If the entity concerned is not a subsidiary, then different documents will be required,
such as a certified copy of commercial registration that has been verified by the relevant embassy.
There are four clearing and settlement systems operating in Japan, each of which is intended for
different settlement purposes:
Clearing system
Bank of Japan Net (BOJNet)
Foreign Exchange Yen Clearing
System (FX–YCS)
Zengin System (domestic funds
transfer system)
Tokyo Clearing House and 121
local clearing houses
Bank-neutral system
ANSER (Automatic Answer
System for Electronic Requests)
Comments
BOJNet is the interbank clearing system. It allows banks with
accounts with BOJ to transfer funds online between these accounts.
BOJNet is owned by the BOJ.
FX–YCS is the cross-border JPY clearing system. All clearing services
involving non-residents are provided through this system. The cut-off
time is 2:00pm.
This is an electronic funds transfer system between domestic JPY
accounts. The cut-off time is 3:25pm.
Tokyo Clearing House is where paper-based items such as
promissory notes and cheques are exchanged for clearing.
Transactions in Osaka are cleared through the agent bank.
Comments
ANSER is not a local clearing system, but part of the de facto public
infrastructure run by NTTData in the local banking industry for bankneutral, real-time Zengin data interchange. ANSER is mostly used for
intra-day, cross-bank cash concentration of resident JPY liquidity. The
cut-off time is 3:00pm.
Please also see the Market Watch section regarding proposed changes to clearing.
The Financial Services Agency (FSA) acts as the regulator for the banking and financial sector in
Japan.
Residency status is determined by the existence of a permanent establishment in Japan. Branches
of foreign incorporated companies are considered as residents, in addition to companies’ Japanese
subsidiaries.
Non-residents are in most instances not subject to any reporting requirements to the Japanese
authorities. Residents must comply with the authorities’ reporting requirements for non-trade related
transactions involving non-residents for any amount over JPY30m or equivalent. The reports are
submitted to the Ministry of Finance via BOJ.
The Financial Instruments and Exchange Law came into effect on 30 September 2007. This law
regulates how financial institutions can sell high-risk products. Similar rules were instituted into
banking law with regard to the handling of non-JPY deposits. As a result, customers are classified as
either professional or amateur. Foreign corporations are regarded as professional by default, but have
the option to be switched to amateur status. (Banks are required to give notice of this option before
handling transactions.) If a foreign corporation opts for amateur status, then the bank is required to
provide it with a document containing charges and risk information, together with an explanation of
the product.
Corporations incorporated in Japan are classified as professional by default if the corporation’s paidup share capital is JPY500m or more, or if its stock is listed, etc.
There has been discussion in the market on whether lender registration is required for inter-company
loans between sister companies in Japan. However, according to the Money-Lending Business
Control and Regulation Law in Japan, the FSA clearly states in a letter dated 26 June 2008 that for
companies that conduct inter-company lending, i.e. JPY sweeps, with other sister companies, lender
registration is required.
The Fund Settlement Law came into effect in April 2010 allowing non-banking businesses to start
providing money remittance services. The law was enacted to regulate all money transfer businesses
including non-banks to protect consumers from this risk. The law is expected to encourage increased
competition, product innovation and pricing reduction for cross border remittances of retail customers.
Amended tax regulation for dividends from overseas subsidiaries: In order to repatriate overseas
income, the tax regulations have been amended to exclude dividends from overseas subsidiaries in a
tax write-off. This became effective in the 2009 accounting year in Japan.
While notional pooling is not prohibited by regulation, it is effectively impossible due to vague tax
treatment. Cash concentration is permissible.
Deposits are typically used as the investment instruments of choice for liquidity structures. However,
as current interest rates in Japan are low, onshore cash concentration in JPY is not actively practised
as corporations prefer to seek higher-yield possibilities in other locations/currencies.
As mentioned, with reference to the Money-Lending Business Control and Regulation Law in Japan,
the FSA has clarified that inter-company lending/sweeping between sister companies would require
lender registration.
The maximum effective tax rate – after amalgamating corporation tax, inhabitants’ tax and enterprise
tax, and allowing for business tax deductions – is 40.69%.
A withholding tax of 20% applies to dividends (reduced to 7% for listed shares except for individuals
holding more than a certain ratio of an outstanding number of shares), inter-company loan interest
and royalty payments to non-residents. A 15% withholding tax is applied to all bank deposit interest
and bond interest to non-residents, but there are more than 56 bilateral double taxation treaties in
place that can reduce the withholding tax rate. To comply with transfer-pricing regulations, all intercompany transactions must be made at arm’s length.
A 5% consumption tax applies to banking charges associated with domestic transactions and must
be an element of any quoted price.
The Bank of Japan decided to adopt zero interest rate policy on 5 Oct 2010 by cutting its key interest
rate to virtually zero. The target rate for unsecured overnight call loans was reduced to 0-0.1% from
0.1%. The decision underscores growing worries about the Japanese economy troubled by strong
yen and falling prices.
Tel: [81] (3) 5203 3133
Tel: [81] (3) 5203 3565 or 3222
Market Watch
Market Analysis: Korea
Overview
Population
48.2 million
Total Area
99,678 sq km
Capital
Seoul
Major Language(s)
Korean
Time Zone
GMT + 9 hours
Currency
Won (KRW)
Central Bank
GDP
Bank of Korea
1,352.5bn (2009 est.); -1.0% real growth rate (2009 est.); 27,791
2.6%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD373.2bn (2009)
equipment; ships and
boats; energy equipment
and energy-related
machinery; vehicles,
commodities (2009)
China - 23.2%, US - 10.1%,
Japan - 5.8%, Hong Kong 5.3% (2008)
USD696.3bn (2009)
Imports c.i.f
Major Imports
USD323.1bn (2009)
iron and steel; optical,
commodities (2009)
Major Suppliers
China - 16.8%, Japan (% of total)
15.3%, US - 9.0%, Saudi
Arabia - 6.1%, UAE - 2.9%,
Australia - 4.6% (2008)
The central bank is the Bank of Korea (BOK). The Financial Supervisory Service regulates the banking
sector.
Since the 1997 Asian financial crisis, there has been consolidation in Korea’s banking industry. At the
instigation of the government, many major domestic banks merged to improve their financial health.
Notable examples are Citibank’s merger with Korea First Bank and Standard Chartered’s merger with
Hanmi bank. The crisis also brought tighter regulations in the banking industry, especially in the way
Account type
Local current1
Local savings
Foreign current1
Foreign savings
Resident
Yes
Yes
Yes
Yes
Non-resident
Yes
Yes
Yes
Yes
Credit interest
No2
Yes
No
Yes
1
1. To encourage local currency deposits, the government permits non-residents to open two types of local currency accounts
under the current regulations: a non-resident free won account (Savings account (NRF) and current account (NCA)) or
a non-resident won account. For non-resident free won account, non-residents are free to remit funds abroad without
underlying documents, although local deposit/withdrawal/transfer is restricted. For the non-resident won account, nonresidents can make local deposits/withdrawals, although remitting funds abroad is restricted.
2. Due to BOK regulations, current accounts pay no interest.
Clearing system
High-value clearing system
(BOK-Wire)
Local foreign currency clearing
system
Retail payment clearing system
Comments
The Bank of Korea Financial Wire Network (BOK-Wire) is an online
network which connects the central bank and participating financial
institutions for real-time gross settlement (RTGS) across current
accounts held with BOK. The cut-off time is 3:00pm.
There are two kinds of local foreign currency clearing system in
Korea.
One is a clearing system provided by Korea Exchange Bank, Kookmin
Bank and Shinhan Bank through their CLS (Continuous Linked
Settlement) memberships using SWIFT network. The cut-off time is
3:00pm for US dollars and euros, and 9:50am for Asian currencies.
The other uses KFTC infrastructure instead of SWIFT network.
On 22nd October 2010, KFTC started a real-time foreign exchange
payment service which is similar to the local currency payment
system using KFTC infrastructure. Kookmin, Shinhan, Woori, and
Korea Exchange bank act as settlement banks. The cut-off time is
4:30 pm.
The retail payment systems comprise the cheque clearing system,
the bank giro system, the Online Funds Transfer (OFT) system, the
Electronic Financial Information Network (EFIN) system, the interbank
cash dispenser/automated teller machine (CD/ATM) system, the
electronic fund transfer at the point of sale (EFTPOS) system, and
the Cash Management Service (CMS) system. All these payment
systems are managed by the Korea Financial Telecommunications
and Clearings Institute (KFTC), a non-profit clearing and financial
data relay centre established and jointly owned by member banks.
The cut-off time is 4:00pm for the OFT system, and 11:00pm for the
EFIN and CD/ATM systems.
financial transactions were conducted among businesses.
At present, there are around 15 domestic banks, the largest of which dominate the local market,
while foreign banks have been more successful in tapping offshore business.
Documentation requirements for opening bank accounts are not particularly onerous and include
standard items such as certificates of business registration, etc.
In addition to BOK, the Ministry of Strategy and Finance is responsible for formulating rules and
regulations relating to the banking and finance sector and the economy as a whole.
When foreign investors wish to set up a subsidiary in Korea by acquiring newly issued/outstanding
stock of a company, they must submit the required declaration form through a FX (Foreign Exchange)
designated bank and take the necessary procedures for capital injection advised by the bank. The
minimum level of injection for foreign direct investment companies is KRW50m.
Branches of foreign corporations must designate a foreign exchange bank through which to channel
working capital, and repatriate the branch’s retained earnings so that the overseas head office can
manage its money.
Transactions between resident and non-resident accounts and cross-border payment transfers are
highly regulated under FETR (Foreign Exchange Transaction Regulation). To comply with the FETR,
it is necessary to submit any underlying documents to the designated foreign exchange bank for the
transaction. However, there is no restriction or limit regarding exchange into KRW or other foreign
currencies.
Foreign exchange regulations on non-resident accounts in local currency are as follows:
Account type
Non-resident free won
account
Non-resident won account
General regulations
• Deposits from overseas and repatriation of funds out of Korea are
allowed without restriction.
• Local payments/collections are generally not allowed except for the
transactions permitted by local foreign exchange regulations (e.g. a result
of normal trading activities).
• Local deposit and withdrawal are allowed without restrictions.
• No repatriation of funds out of Korea from this account is allowed,
except for the transactions permitted by local foreign exchange
regulations.
Cash concentration and notional pooling between resident and non-resident is allowed up to
USD30m for inter-companies under FETR, but BOK approval is required. Cash concentration means
inter-company lending, hence a tax implication issue arises. Single currency cash concentration
between residents and between residents and non-residents could be provided by HSBC SEL. In
case of cash concentration, a withholding tax on interest arising from inter-company lending is levied
on the borrowing company.
Corporate customers should be aware of their planning of liquidity management, as the cash
concentration between residents and non-residents is permitted up to USD30m (no limit between
residents). The tax implication for inter-company lending should be applied in this case. A fair market
interest rate should apply to inter-company lending. Currently the rate is 8.5% or the weighted
average borrowing rate of the lender. Withholding tax on the interest arising from inter-company
lending between residents is 25%. Currently the withholding tax on interest income for corporate
customers is 14%.
The withholding tax rate for non-residents varies, and depends on international tax treaties where
they exist.
The government is continuing its policy of gradual deregulation, as witnessed by legislation such as
the Financial Investment Services and Capital Market Act promulgated in 2007 and the government’s
intention to raise the shareholding cap on non-financial company ownership of banks.
Tel: [82] (2) 2004 0623
Tel: [82] (2) 2004 0327
Market Watch
Market Analysis: Macau SAR
Overview
Population
526,000
Total Area
29 sq km
Capital
n/a
Major Language(s)
Cantonese, Portuguese and English
Time Zone
GMT + 8 hours
Currency
Pataca (MOP)
Central Bank
GDP
The Monetary Authority of Macau (AMCM)
USD21.2bn (2009 est), 2.2% real growth rate (2009 est.),
USD38,954 per capita (2009 est.)
1.2%
Trade
Exports f.o.b
Major Exports
USD96.0m (2009)
Imports c.i.f
Major Imports
accessories; jewels,
metals; electrical machinery
and equipment; mineral
products; and other
commodities (2009)
Major Markets
(% of total)
Hong Kong - 39.2%, US
- 17.1%, China - 14.6%,
Germany - 3.9% (2009)
USD5.6bn (2009)
Total Trade
USD4.6bn (2009)
precious metals; energy
equipment and energyrelated machinery; clocks
and watches, parts and
commodities (2009)
Major Suppliers
China - 31.4%, Hong Kong (% of total)
11.0%, Japan - 8.2%, France
- 8.0%, US - 6.0% (2009)
The Monetary Authority of Macau (AMCM) was established in 1989 with the function of a quasicentral bank and the power to supervise the financial system of the Macau Special Administrative
Regon (SAR), covering both banking and insurance sectors.
At present, there are 28 banks in Macau: 12 are locally incorporated (including the postal savings
office) and 16 are branches of overseas banks. With the exception of two offshore banks, all banks in
Macau are fully licensed retail banks.
On the insurance side, there are 24 insurance companies, 11 of which are life companies while the
Account type
Local current
Local savings
Foreign current
Foreign savings
Resident
Yes
Yes
Yes
Yes
Non-resident
Yes
Yes
Yes
Yes
Credit interest
No
Yes
No
Yes
The local clearing system is owned, managed and run by the AMCM. Both MOP and Hong Kong
dollar (HKD) domestic cheques can be cleared in two days. There is no settlement through the
Macau clearing system on Saturday and Sunday.
At present, Macau has no real-time gross settlement (RTGS) system or electronic automated clearing
houses (ACHs). Therefore, most companies use the in-house ACH facilities of major banks for
standing orders, direct debits and SWIFT payments. Cheques are also commonly used, denominated
in either MOP or HKD. In the absence of RTGS and ACHs, clearing in Macau is mostly paper-based.
There are no exchange control regulations. For local companies involved in exports, 40% of the
relevant foreign currency transaction amount is surrendered to the government to exchange into
MOP.
The AMCM is the regulatory body responsible for supervising the banking and insurance sectors.
This includes the supervision of bureau de change. For banks registered as an overseas branch in
Macau, there is no capital requirement.
There are four basic steps to establishing a company in Macau:
• Application regarding the admissibility of a trade name, which should be submitted to the
Commercial Registry Office (CRCBM) and include a clear definition of the company’s objectives.
• Completion and signing of the company’s memorandum and articles of association (which must
be done within 60 days of obtaining the trade name). This can be done through the Macao Trade and
Investment Promotion Institute’s private notary, a Macau-registered lawyer, or by the applicant and
certified by a notary.
• Registration of the company (must be completed within 15 days of signing the memorandum of
association) with the CRCBM, which requires submission of the following:
– Letter of application with verified signature;
– Company constitution document;
– List of shareholders with copies of their ID;
– List of board members;
– Company board’s letter of appointment;
– Copy certificate of admissibility of the company’s trade name; and
remaining 13 are involved in non-life business. Eight are local companies and the rest are branches of
overseas companies.
The authority for the supervision, coordination and inspection of insurance activities rests with the
Chief Executive, while the actual execution of these functions is carried out by AMCM through its
Insurance Supervision Department.
There are no particular restrictions on opening bank accounts in Macau. However since Macau
law is Continental Law (rather than Common Law) the Commercial Code applies to new company
formations (e.g. partnerships are not allowed).
For foreign corporations, a beneficial ownership declaration is required.
– List of names of the administrative board.
• Making a declaration of commencement of operation to the Macau Finances Services Bureau,
which must include:
– Completed industrial tax form with verified signature;
– List of shareholders with copies of their ID;
– List of board members and their letter of appointment;
– Certificate of registration issued by the CRCBM;
– Copy of the memorandum and articles of association; and
– Payment of the industrial tax (see “Liquidity, Currency and Tax” section).
Macau has fairly “benign” banking regulations compared to other Asia-Pacific territories and
countries. However, there are regulations that restrict liquidity management. For example, in-country
notional pooling is only permitted subject to validation of enforceability right of set-off, while MOP
cross-border notional pooling and MOP cross-border sweeping are not permitted.
The following is a list of the key areas of taxation affecting companies with operations in Macau:
• Property tax – 16% of rental income;
• Industrial tax – a fixed fee of MOP300 on each business activity;
• Complementary (profits) tax – sliding scale tax rates averaging 12% on income over MOP300,000;
and varying between 3% and 12% for income below this level;
• Professional tax of between 7% and 12% charged on the individual’s annual income in excess of
MOP120,000;
• Stamp duty of 3% on transfer of real estate worth over MOP4m; and
• Social security contributions – the monthly contribution made by the employer is MOP30 per
resident employee and MOP45 per non-resident employee.
There is no withholding tax in Macau.
Market Watch
After further relaxation of the RMB trade settlement scheme announced by the People’s Bank of China
(PBOC) in July 2010, the RMB business scope of banks in Macau has further expanded. However,
compared to Hong Kong, services allowed in Macau are still more restricted and approval from Monetary
Authority of Macau (AMCM) often needs to be sought on a case by case basis.
Tel: [853] 8599 2273
Tel: [853] 8599 2131
Market Analysis: Malaysia
Overview
Population
27.0 million
Total Area
330,803 sq km
Capital
Time Zone
Kuala Lumpur
Bahasa Malaysia, English, Mandarin, and other Chinese dialects,
and Tamil
GMT + 8 hours
Currency
Ringgit (MYR)
Central Bank
GDP
Bank of Negara Malaysia (BNM)
376.2bn (2009 est.); -3.6% real growth rate (2009 est.); 13,551 per
cpaita (2009 est.)
-0.1%
Major Language(s)
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD157.4bn (2009)
equipment and energyrelated machinery; mineral
products; animal, vegetable
fats and oils; rubber and
commodities (2009)
Singapore - 14.0%, China 12.2%, US - 11.0%, Japan 9.8%, Thailand - 5.4%, Hong
Kong - 5.2% (2009)
USD281.3bn (2009)
Imports c.i.f
Major Imports
USD123.9bn (2009)
products; vehicles, parts and
accessories; plastics and
plastic articles; and other
commodities (2009)
China - 14.0%, Japan
Major Suppliers
(% of total)
- 12.5%, US - 11.2%,
Singapore - 11.1%, Thailand 6.1%, Korea - 4.6% (2009)
The financial industry is governed by the Banking and Financial Institutions Act of 1989 (BAFIA) and
regulated by Bank Negara Malaysia (BNM), the central bank of Malaysia, which is responsible for
monitoring and supervising the banking and financial systems of the country and administrating its
exchange control regulations.
Malaysia’s banking sector has undergone consolidation in recent years. There are now nine local
commercial banks, 14 foreign commercial banks, 15 investment banks, 11 Islamic banks and 7
International Islamic Banks. An international offshore financial centre is located in Labuan, East
Malaysia.
Account type
Purpose
Local currency
accounts:
Current
Cheque book provided, non-interest-bearing account
Savings
Time deposit
Foreign currency
accounts:
Current
No cheque book provided; interest-bearing account
Interest-bearing account with various fixed maturity tenures
ranging from one to 60 months
Cheque book provided, non-interest-bearing account
Savings
Time deposit
No cheque book provided; interest-bearing account
Interest-bearing account with fixed maturity tenures of one,
three, six, nine and 12 months
Corporates are prohibited from maintaining local and foreign currency savings accounts.
Clearing system
Comments
RENTAS (Real-Time Electronic
RENTAS is a nationwide, real-time gross settlement system (RTGS)
Transfer of Funds and Securities) for electronic domestic payments.
The current minimum amount for third party payments is
MYR10,000 for conventional and Islamic accounts through manually
initiated transactions. The minimum threshold limit for Internet
banking channels is currently set at MYR50,000. There is no limit
for accounts favouring RENTAS members’ own accounts. The limit
is not applicable to payments in favour of BNM, federal ministries,
state governments and other government bodies such as the Social
Security Organisation, Employees’ Provident Fund or any institutions
specified by BNM.
CTCS (Cheque Truncation and
Cheque Truncation uses the electronic image and Magnetic
Conversion System)
Ink Character Recognition (MICR) data of the cheque and not
the physical cheque to process clearing. Cheques are digitally
transmitted, thus efficiently reducing time needed for payment
transactions.
IBG (InterBank Giro)
IBG, operated by MEPS (Malaysian Electronic Payment Services)
since October 2000, involves an exchange of digitised transactions
to effect payment orders that are less than MYR100,000 per
transaction1. IBG services are currently available between
participating banks that are MEPS members only. Transfer of funds
between an external account2 and resident account are allowed up to
RM5,000 per day in aggregate for any purpose.
1. MEPS is in discussions with banks to increase the current threshold of MYR100,000 to MYR500,000 with the roll-out
schedule planned in phases from November 2010 to September 2011
2. An external account means a MYR account maintained with financial institution in Malaysia by a non-resident or where the
beneficiary of the funds is a non-resident.
In addition to Bank Negara Malaysia, other important regulatory/government bodies in Malaysia
include:
• Malaysia’s Ministry of Trade & Industry (MITI);
• Companies Commission of Malaysia (SSM);
• Royal Malaysian Customs; and
• The Inland Revenue Board.
Incorporation of a local company in Malaysia includes the following procedures:
• A name search with the SSM, using Form 13A; and
• Lodgement of incorporation documents, including:
– Memorandum and articles of association;
– Form 48A (Statutory declaration under oath by the promoter(s) of a company confirming, amongst
other things, that he/she is not an undischarged bankrupt, has not been convicted/imprisoned of the
prescribed offences and consenting to act as a director of the company [minimum requirement of at
least 2 directors resident in Malaysia]);
– Form 6 (Declaration of compliance with Companies Act requirements by the company secretary);
and
– Form 13A and a copy of the SSM letter approving the company’s name.
Registration of a foreign company in Malaysia follows a similar procedure in terms of name search,
but the registration documents required include:
• Certified copy of the certificate of incorporation or registration of the foreign company in its home
jurisdiction;
• Certified copy of the foreign company’s charter, statute or memorandum and articles of association
or other instrument defining its constitution;
• Form 79 (Return by foreign company giving particulars of its directors and changes of particulars);
• Where the Form 79 includes directors resident in Malaysia who are members of the local board of
directors, a Memorandum by the foreign company stating the powers of the local directors;
• Memorandum of appointment or power of attorney authorising the person(s) residing in Malaysia,
to accept service of process and notices on behalf of the foreign company;
• Form 80 (Statutory declaration by agent of foreign company); and
• Form 13A and a copy of the SSM’s letter approving the company’s name.
Only local currency cash concentration and notional pooling are permitted in Malaysia. However,
companies wishing to participate in cross-border foreign currency cash concentration can first apply
for permission from BNM
However, in practice, comparatively few banks offer notional pooling because of the associated
reserve requirements. Notional pool accounts are taken into account when calculating reserve
requirements, so there is a cost to banks in terms of reserves they must set aside for what is
effectively virtual money in the notional pool. Where banks do offer notional pooling this additional
cost has to be covered. Therefore, unless there are significant countervailing considerations relating
to matters such as inter-company lending/tax, notional pooling may not always prove cost-effective.
Time deposits, wholesale money market deposits and repurchase agreements (repos) are available
to companies looking for return on short- to medium- term liquidity. Central bank regulations forbid
banks from paying interest to corporates on current accounts and also forbid corporates from holding
savings accounts. Repos are therefore the legally acceptable alternative. While longer term local
currency commercial paper is available, liquidity and yield-to-risk options are limited.
In its efforts to promote international trade and a conducive business environment in Malaysia, BNM
has further liberalised the Foreign Exchange Administration Rules in allowing:
• Trade settlement between resident and non resident in ringgit. The settlement by non-resident
shall be conducted via their ringgit account maintained with licensed onshore banks; or convert
foreign currency into ringgit with licensed onshore banks or with the appointed overseas branches of
banking groups of the licensed onshore banks.
• Borrowing of any amount in foreign currency by a resident company from its non-resident non-bank
related company, in addition to its non-resident non-bank parent company.
• Hedging for anticipated current account transactions to the cumulative amount received or paid in
the preceding 12 months by residents with the licensed onshore banks by abolishing the limit.
• Please refer to the BNM website for further information, www.bnm.gov.my
Types of income subject to withholding tax for non-residents include:
Payment type
Contract payment1
Interest2
Royalty2
Technical advice, assistance or services performed in Malaysia, rent/payment
for use of moveable property
Real estate investment trust (REIT)3:
(i) Other than a resident company
(ii) Non-resident company
(iii) Foreign institutional investors (e.g. pension funds, collective investment
schemes)
Withholding tax rate
10% and 3%
15%
10%
10%
10%
25%
10%
1. Where the non-resident has a permanent establishment in Malaysia.
2. Withholding tax rates may be reduced under the relevant double taxation agreement between Malaysia and the nonresident’s jurisdiction.
3. The above withholding tax rate imposed on a REIT is effective from 1 January 2009 to 31 December 2011.
Market Watch
Tel: [60] (3) 8312 3696
Tel: 1 800 88 3898
Market Analysis: Mauritius
Overview
Population
1.3 million
Total Area
2,040 sq km
Capital
Time Zone
Port Louis
English (official language), French (widely spoken), Creole (local
dialect)
GMT + 4 hours
Currency
Mauritian rupee (MUR)
Central Bank
GDP
The Bank of Mauritius
capita (2009 est.)
6.4%
Major Language(s)
Trade
Exports f.o.b
Major Exports
USD1.8bn (2009)
accessories; meat, fish and
other aquatic invertebrates;
sugars and sugar
confectionary; and other
commodities (2009)
Major Markets
(% of total)
UK - 27.0%, France - 21.2%, Major Suppliers
(% of total)
US - 8.3%, Italy - 5.5%,
Belgium - 2.6%, Madagascar
- 6.4%, UAE - 0.3% (2009)
USD5.5bn (2009)
Total Trade
Imports c.i.f
Major Imports
USD3.7bn (2009)
fish and other aquatic
invertebrates; and other
commodities (2009)
India - 18.7%, China - 12.6%,
France - 11.8%, South Africa
- 8.7% (2009)
The central bank is the Bank of Mauritius, which acts as the local regulator for the banking industry.
It does so within various acts of legislation, including the Banking Act 2004, Bank of Mauritius
Act 2004, Companies Act 2001, and Financial Intelligence and Anti Money Laundering Act 2002,
Prevention of Terrorism Act 2002, Convention for the Suppression of the Financing of Terrorism Act
2003, Borrowers Protection Act 2007, Data Protection Act 2009 and Insolvency Act 2009.
Account type
Resident
Local Currency
Current
Yes
Savings
Yes
Foreign Currency
Current
Savings
Yes1
Yes
Non-resident2
Yes
Yes
Yes1
Yes
Credit interest
No
Yes
No
Yes
1. Foreign currency cheque books are not available.
2. For opening of non-resident accounts, a letter of introduction from an acceptable bank may be required.
Clearing system
Comments
MACSS (Mauritius Automated
This is a specially designed large-value interbank payment system,
Clearing and Settlement System) which is based on real-time gross settlement (RTGS) principles. It
was introduced on 15 December 2000 and is operated by the Bank
of Mauritius. The cut-off time is 3:30pm.
Paper Cheque Clearing
Cheque clearing takes place at the Port Louis Clearing House,
with cheques physically exchanged and clearing information and
settlement done through MACSS by the submission of electronic
files to the Bank of Mauritius. Cheque payments between customers
of the same bank typically take one working day to clear; between
customers of different banks it takes two working days.
As Mauritius does not have a local automated clearing house (ACH) system allowing for highvolume low-value payments between banks, MACSS is used for all electronic payments. There is no
minimum payment value requirement for using the system.
As mentioned earlier, anti-money laundering requirements have tightened appreciably and the
purpose of all payments must now be stated.
Cash Management Solutions at a glance:
Investment Product
Time deposit
Treasury bills
Transaction Management
Payments
Collections
Cheques/demand drafts Cash collection1
Cheque collection2
Electronic payments
Corporate credit cards
Direct debits
Payments Advising
Liquidity Management
Overdraft facilities3
Auto-sweeping (In
country)
1. Cash management services are delivered via HSBCnet, HSBC’s electronic banking systems.
2. Through branch network.
3. Subject to credit approvals.
Payment Capabilities and Cut-off times
Electronic Payments
MACSS
GIRO/ACH
Payroll
International Funds transfer
Yes
N/A
Yes
Yes1
15:00
N/A
15:00
13:00/14:001
1. Depending on the currency of transfer.
Bank Demand
Draft
Petty Cash
Cheque
Outsourcing (via
HSBCnet)
Yes
N/A
Available during N/A
branch hours
Payment
Advising
Yes
Yes
branch hours
For non-banking financial services, the local regulator is the Financial Services Commission.
The Companies Act 2001 provides for several types and categories of companies:
• Domestic company;
• Company holding a Category 1 Global Business Licence; and
• Company holding a Category 2 Global Business Licence.
These companies may be:
• Limited by shares: A company formed on the principle of having the liability of its shareholders
limited by its constitution to any amount unpaid on the shares respectively held by the shareholder.
• Limited by guarantee: A company formed on the principle of having the liability of its members
limited by its constitution to such amount as the members may respectively undertake to contribute
to the assets of the company in the event of its being wound up.
• Limited by both shares and guarantee: A company whose constitution limits its life to a period not
exceeding 50 years from the date of its incorporation. However, this period may be extended to a
maximum of 150 years. Its constitution contains the specific matters as laid down in the law.
Mauritius has free and liberal financial and money market policies with no exchange controls.
Investment instrument options for surplus liquidity are simple; most companies use term deposits.
Corporate income tax rate is 15%.
There are two classifications of companies operating in the global business (offshore) sector:
• GBC1 Companies: Category 1 Global Business Companies; and
• GBC2 Companies: Category 2 Global Business Companies.
Each classification has a different tax regime. A GBC1 is taxed on its chargeable income at the
corporate income tax rate of 15%, but can claim a deemed foreign tax credit of 80%, thus resulting
in an effective tax rate of 3%. This rate can be further reduced if the actual foreign tax paid on the
chargeable income is higher. A GBC2 is tax-exempt.
Capital gains are exempt in Mauritius.
There is no withholding tax on interest paid to companies and non-resident individuals.
Profitable firms are required to spend 2% of their profits on corporate social responsibility (CSR)
activities approved by the government or to transfer these funds to the government to be used in the
fight against poverty.
Market Watch
Mauritius has a number of double taxation agreements already in place and is currently looking to
establish more. The government is generally keen to provide incentives for the financial services
industry to expand in the country. By establishing a favourable tax regime, the intention is to attract
Paper Payments
Local Currency Foreign
Cheque
Currency
Domestic
cheque
Yes
Yes
N/A
N/A
more foreign direct investment.
Of notable importance is a USD500m investment agreement struck between the Tianli Group of
China and the Government of Mauritius, resulting in the creation of the Mauritius Tianli Economic and
Trade Cooperation Zone, which is expected to lead to the creation of 7,500 direct and indirect jobs.
Tel: [230] 203 8303
Tel: [230] 202 0999
Market Analysis: New Zealand
Overview
Population
4.2 million
Total Area
270,467 sq km
Capital
Wellington
Major Language(s)
English and Maori
Time Zone
GMT + 12 hours
Currency
New Zealand dollar (NZD)
Central Bank
GDP
The Reserve Bank of New Zealand
capita (2009 est.)
1.5%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD25.0bn (2009)
Imports c.i.f
Dairy produce and products Major Imports
of animal origin; meat and
edible meat; offal; wood and
wood articles; mineral fuels,
(2009)
USD25.7bn (2009)
equipment and energyrelated machinery;
equipment; vehicles, parts
and accessories; aircraft,
spacecraft, and related parts;
(2009)
Australia - 18.4%, China Australia - 23.3%, US - 9.6%, Major Suppliers
15.1%, US - 10.5%, Japan
China - 9.2%, Japan - 7.1%, (% of total)
- 7.2%, Germany - 4.2 %,
UK - 4.2% (2009)
Singapore - 4.1% (2009)
USD50.7bn (2009)
The Reserve Bank of New Zealand (RBNZ) is the central bank of New Zealand. It is responsible
for monetary policy, currency and the maintenance of the financial system. It also has a policy and
operational role in respect of the in-country payment settlement systems.
There are currently 19 banks registered in New Zealand. Due to the close economic ties between
Australia and New Zealand, many of the local and international banks in Australia can also be found in
New Zealand.
Account type
Local current
Local savings
Foreign current
Foreign savings
Resident
Yes
Yes
Yes
Yes
Non-resident
Yes
Yes
Yes
Yes
Credit interest
Yes
Yes
Yes
Yes
New Zealand has a very developed and sophisticated cash management infrastructure. Its foundation is
based on the foresight of local banks nearly 40 years ago, beginning with the creation of three centralised
electronic clearing houses providing overnight settlement, securities trading, and interbank/high-value,
same-day transactions. The benefits continue to accrue today, and over 90% of all payments are made
electronically.
Clearing system
Interchange and Settlement Ltd
(ISL)
Austraclear
Same-day cleared payments
(SCP)
Comments
A low-value clearing system used for paper-based and overnight
clearing files. Cheques, direct debits/credits and automatic payments
are interchanged among the banks with value being given for the
day the payment enters the system. Single payments (also known
as priority payments) are also cleared through ISL. These are
interchanged and settled in the same manner as files – with value
also given for the day the payment enters the system.
The primary real-time gross settlement (RTGS) system for settlement
of securities trading and clearing transactions. No minimum value
requirement applies.
SCP is also used for RTGS transactions. It is commonly used for
settlement of interbank, property and share transactions and some
commercial payments. No minimum value requirement applies.
While New Zealand is a relatively deregulated environment in which to conduct business, corporates
need to take into account the country’s tax regulations, restrictions on cross-border transactions as well
as flow of financial information in certain circumstances.
New Zealand has no regulatory restrictions on pooling or cash concentration. However, while notional
pooling and cash concentration are not restricted, in practice relatively few banks offer notional
domestic currency pooling or cross-border cash concentration.
There is limited commercial paper available, so most corporate surplus liquidity tends to be invested
in money market and term deposits.
While there are certain restrictions on cross-border transactions and the flow of financial information,
there are no specific regulations governing foreign exchange transactions in New Zealand.
Profits earned by a company are taxed at the company tax rate of 28% for the 2011–12 income year.
There is no capital gains tax in New Zealand.
Withholding taxes levied in New Zealand vary according to domicile and category of payment (e.g.
interest, dividends, royalties, etc.).
Market Watch
Tel: [64] (9) 918 8600
Tel: [64] (9) 918 8730
Market Analysis: The Philippines
Overview
Population
90.3 million
Total Area
300,000 sq km
Capital
Manila
Major Language(s)
Filipino and English
Time Zone
GMT + 8 hours
Currency
Philippine peso (PHP)
Central Bank
GDP
Bangko Sentral ng Philipinas (BSP)
capita (2009 est.)
2.8%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD39.5bn (2009)
equipment; machinery and
mechanical applicances;
vehicles, parts and
accessories; optical,
accessories; wood and
wood articles; and other
commodities (2009)
US - 17.5%, Japan - 16.2%,
China - 7.6%, Singapore
- 6.6%, Germany - 6.5%,
Hong Kong - 8.3%, Korea 4.7% (2009)
USD85.4bn (2009)
Imports c.i.f
Major Imports
USD45.9bn (2009)
machinery and mechanical
applicances; vehicles, parts
and accessories; cereals; and
Major Suppliers
(% of total)
Japan - 16.2%, US - 17.5%,
Singapore - 6.6%,
China - 7.6%, Taiwan - 3.5%
(2009)
The Bangko Sentral ng Pilipinas (BSP), the primary regulator, issues policy guidelines for general bank
supervision.
There are 38 banks active in the Philippines, with all but three of the major local banks being majorityowned and controlled by the private sector. Foreign banks, of which there are 17, can operate as a
branch or a subsidiary subject to the same regulations as the local commercial banks. The Philippines’
banking sector is considered overpopulated, and a trend towards consolidation continues.
Documentation requirements for opening corporate bank accounts include identification documents
(Securities and Exchange Commission registration and articles of incorporation for corporations) to
satisfy Know Your Customer (KYC) requirements and a Board Resolution/Secretary’s Certificate.
If foreign corporations are registered to do business in the Philippines, there are no special
requirements regarding their bank accounts. If they are not registered, then they are considered nonresident accounts and limitations in terms of repatriation of funds will apply.
Account type
Local current2
Local savings2
Foreign current2
Foreign savings2
Resident
Yes
Yes
Yes
Yes
Non-resident
No
No
Yes
Yes
Credit interest
Yes
Yes
Yes
Yes
1
1. Accounts opened by non-resident companies must be funded by inward remittances of foreign currencies, or by over-thecounter deposits of local currency as long as there is proof that the source is income derived from a property or asset
located in the Philippines.
2. Account types: CUN (current accounts) and SSV (savings accounts) are available.
There are three major local currency clearing systems in The Philippines: the cheque clearing
infrastructure for paper-based payments (TCCH), Financial Information Service Co. Ltd (FISC) and the
automated clearing house (ACH) for electronic payments:
Clearing system
Philippine Clearing House
Corporation (PCHC) local cheque
clearing
Comments
This is a paper-based clearing system operated by PCHC, which is
the only entity authorised by BSP to clear cheques in Metro Manila
and its integrated regions. Local currency cheques and cashier’s
orders take three working days to clear.
PCHC regional cheque clearing
Local currency cheques presented by banks and branches located
in specific provinces are cleared through BSP and PCHC. These
cheques usually take seven days to clear.
Provincial cheques for collection Cheques presented through areas not mentioned in either local
or regional clearing are mailed to these areas and cleared in
approximately 30–45 working days. Such items are also referred to
as out-of-town cheques.
PCHC PHP and US dollar (USD) Funds in local currency can be electronically transferred between
foreign exchange clearing
member banks’ head offices through PCHC end-of-day-netting.
Electronic interbank transfers are now settled within 24 hours or by
the next working day. The cut-off time is 4:00pm.
PDDTS (Philippines Domestic
The PDDTS has online, real-time and end-of-day batch netting
Dollar Transfer System)
transfer capabilities with final settlement on the same day. All USD
transfers processed via the real time gross settlement (RGTS) mode
are delivered through PDDTS online. The cut-off time is 3:00pm.
PPS (Philippine Payment System The PhilPass is the Philippines’ version of RTGS for PHP. Payments
or PhilPaSS)
are sent via SWIFT and are a same-day transfer provided within set
cut-off times, with settlement on the same day via BSP. The cut-off
time is 3:00pm.
Clearing systems in the Philippines are owned and operated by the Banker’s Association of the
Philippines (BAP), which in turn is owned by BAP member banks.
Many banks offer cheque outsourcing and low-value electronic payments. Some also offer on-site
cheque-writers and payments advising.
Banks with nationwide branch networks allow over-the-counter deposit of cheques and cash at any
point in the network to a single account. Foreign banks, whose branch networks are not as extensive,
will usually partner with local banks, enabling payments through the latter’s branches into a central
account. Both local and foreign banks offer collections outsourcing via a third-party courier. Electronic
collections via direct electronic debit of accounts are implemented within a single bank as the country
lacks the infrastructure to enable this seamlessly on an interbank basis.
Apart from the central bank, other relevant regulatory bodies include the Securities and Exchange
Commission, the Insurance Commission and the Philippine Deposit Insurance Corporation.
There are no minimum capitalisation requirements for companies in unregulated industries, but these
do apply in the case of the financial services industry. This distinction also applies to local subsidiaries
of foreign corporations.
Some banks offer automated sweeping and cash concentration services. Overdrafts and,
consequently, offsetting of negative and positive balances, are not allowed in the Philippines. Notional
pooling is not allowed.
The most common investment instruments for surplus liquidity are time deposits, but there is also
some activity in commercial paper and other money market instruments.
There are several restrictions and regulatory requirements that are intended to curb speculative
attacks against PHP, which is not readily convertible into other currencies.
Corporate income tax is levied at 32%, while a 20% withholding tax is applied to all interest income.
Documentary stamp tax applies to all time deposit products. Any interest paid on a deposit account
that is 50% higher than the regular CASA rates is also subject to documentary stamp tax. There are
no offshore/onshore distinctions as regards corporate taxes.
Market Watch
In general, the regulatory landscape in the Philippines is fluid. Therefore any corporation contemplating
direct foreign investment in the Philippines is well-advised to seek professional advice in advance.
Tel: [63] (2) 581 7329
Tel: [63] (2) 581 7380
Market Analysis: Singapore
Overview
Population
4.6 million
Total Area
705 sq km
Capital
n/a
Major Language(s)
English, Malay, Mandarin and Tamil
Time Zone
GMT + 8 hours
Currency
Singapore Dollar (SGD)
Central Bank
GDP
Monetary Authority of Singapore (MAS)
234.8bn (2009 est.); -3.3% real growth rate (2009 est.); 49,433
-0.2%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD271.0bn (2009)
products; organic chmeicals;
(2009)
Hong Kong - 11.5%,
Malaysia - 11.4%, China 9.7%, Indonesia - 9.6%, US 6.6%, Korea - 4.6%,
Japan - 4.5% (2009)
USD517.0bn (2009)
Imports c.i.f
Major Imports
USD246.0bn (2009)
aircraft, spacecraft, and
related parts; and other
commodities (2009)
Major Suppliers
US - 11.9%, Malaysia (% of total)
11.6%, China - 10.55%,
Japan - 7.6%, Indonesia 5.8%, Korea - 5.7%, Taiwan 2.0% (2009)
The Monetary Authority of Singapore (MAS) is the central bank of Singapore. It formulates and
executes Singapore’s monetary policy, manages its foreign reserves and issues Singapore’s currency
and government securities. As supervisor and regulator of Singapore’s financial services sector, it has
prudential oversight over the banking, securities, futures and insurance industries.
Singapore’s three large local banking groups, DBS, UOB and OCBC dominate the local retail banking
scene. In order to liberalise the banking sector in Singapore, MAS has awarded qualifying full bank
status to a number of foreign banks, which will allow them to open up to 25 sub-branches or offsite
automated teller machines. Other foreign banks have been awarded wholesale bank status to allow
them to serve commercial customers in Singapore.
Documentation requirements for opening bank accounts for local corporations include items such as
the necessary corporate authorisations, shareholder list, memorandum and articles of association,
etc. However, for foreign corporations wishing to open bank accounts there are additional
requirements, including:
• Certificate of incumbency issued by professional/registered agent or a director’s declaration
detailing particulars of the directors and principal shareholders;
• Certification letter from a certified public accountant/lawyer of a European Union/Financial
Action Task Force member jurisdiction certifying that the information contained in the certificate of
incumbency or director’s declaration is correct and accurate;
• Certified true copy of certificate of good standing (for tax haven countries); and
• Letter of authorisation to debit account opening fee (for tax haven countries).
Account type
Resident
Local currency
current
Yes
Local currency
savings1
Yes
Foreign currency
current
Yes
Foreign currency
savings1
Yes
Non-resident
Yes
Yes
Yes
Yes
1. In Singapore, savings accounts are not offered to corporates.
TMAS governs the cheque and electronic clearing system in Singapore. All banks adopted the five-day
clearing week system on 15 May 2006. There are three principal clearing systems in Singapore:
Clearing system
Comments
MAS Electronic Payment System MEPS+ is a real-time gross settlement (RTGS) system. It enables
(MEPS+)
instantaneous and irrevocable transfer of funds (SGD) and Singapore
government securities. The cut-off times are 4.30pm for electronic
instructions and 3:30pm for paper instructions.
Cheque Truncation System
The CTS is an image-based automated clearing system for SGD and
(CTS)
locally issued US dollar cheques. It is operated by Banking Computer
Services Pte Ltd (BCS). All banks participating in this clearing system
use image-based technology to provide a cheque clearing service.
The cheque deposit cut-off times are:
SGD Cheques:
• Monday to Wednesday, 3:00pm. Funds available on the next
banking day after 2:00pm;
• Thursday, 3:30pm. Funds available the next banking day after
2:00pm; and
• Friday, 3:30pm. Funds available the next banking day after 2:00pm.
USD Cheques:
• Monday to Friday, 1:00pm. Funds available on the next banking day
after 2:00pm
GIRO System (automated clearing The eGIRO system is also operated by the BCS. It is designed for
house – ACH)
electronic transfer of high-volume smaller-value payments. The cutoff time is 5:00pm
Singapore’s regulatory environment is among the least restrictive in the world and is complemented
by a similarly competitive tax environment. Low withholding taxes and double taxation agreements
with more than 50 countries provide a favourable environment for large corporates looking to
establish regional treasury centres.
MAS does not encourage the internationalisation of the SGD; therefore, restrictions apply to the
extension of credit facilities that are denominated in SGD to non-resident financial institutions.
The banking secrecy provisions of the Banking Act of Singapore prohibit the disclosure of customer
information except in circumstances permitted in the act.
Singapore provides incentives (mainly tax-related) for locating a company’s operational headquarters
(OHQ) or a finance and treasury centre (FTC) in Singapore. There are also incentives for locating
regional treasury centres (RTC), subject to pre-defined minimum criteria set out by the Singapore
government.
A foreign entity may invest in Singapore either through a locally registered branch or an incorporated
subsidiary. There is no restriction on the percentage of equity ownership, nor any restriction on the
repatriation of profits out of the country, so funds can easily be remitted in and out of Singapore.
In general, there are no minimum capitalisation requirements in Singapore (except for financial
institutions) and there are no thin capitalisation rules. Further information on regulatory requirements
can be found at www.acra.gov.sg.
Singapore has a large number of treasury centres, managing foreign exchange and liquidity on behalf
of the region. In general, there are no restrictions on liquidity management structures in Singapore,
enabling complex structures to be put in place. This applies to both cash concentration and notional
pooling on both a multiple- or single-currency basis. This enables large multinational companies to
set up their regional liquidity centres and shared service centres in Singapore.
A wide range of local yield enhancements options are available for surplus liquidity. Interest-bearing
local and foreign currency current accounts are commonly used, as well as money market funds and
structured deposits.
Singapore’s liberal financial system generally does not have any currency or capital controls. However
banks have to observe the government’s policy of discouraging the internationalisation of the SGD
(as mentioned earlier). MAS’s policy on the non-internationalisation of the SGD essentially restricts
the lending of SGD by banks in Singapore to non-resident financial institutions for the purpose of
speculation in the SGD currency market:
• Banks in Singapore may not extend aggregate SGD credit facilities exceeding SGD5m to nonresident financial institutions where they have reason to believe that the proceeds may be used for
speculation against SGD.
• For a SGD loan to a non-resident financial institution exceeding SGD5m or for a SGD equity or bond
issue arranged by a bank in Singapore for a non-resident financial institution where the proceeds will
be used to fund overseas activity, the SGD proceeds must be swapped or converted into foreign
currency before remitting outside Singapore.
These SGD lending restrictions do not apply to non-resident financial institutions and there is
currently a large offshore market in SGD abroad.
The prevailing corporate tax rate in Singapore is 17% (from 2010 onwards) and there is no capital
gains tax. Certain payments made to non-residents are subject to Singapore withholding tax.
For more information, please refer to the Inland Revenue Authority of Singapore web site,
www.iras.gov.sg.
Whether there are any tax considerations arising from cash concentration/pooling schemes will
depend on the circumstances of each case and companies are well-advised to seek independent tax
advice in this respect.
Market Watch
Singapore Budget 2010:
• As part of the Singapore Budget 2010, the Government of Singapore will commit SGD450m over
five years to start a programme for government agencies to work with companies to co-develop
innovative solutions for medium to long term needs.
• The Government of Singapore will also set up a National Productivity Fund with SGD2bn for
initiatives customised to specific industries, clusters and enterprises, with a focus on sectors with
the potential for large gains in productivity. SGD1bn was injected in 2010.
• To build stronger partnerships between local enterprises and MNCs, SGD250m will be set
aside over five years to help local enterprises develop competencies to meet MNCs’ stringent
manufacturing quality and certification requirements.
• A new scheme will be introduced to allow approved GST-registered businesses to defer import
GST that is payable on their goods at the point of entry into Singapore. The import GST is deferred
for at least one month and declared as a payable amount in the corresponding GST return.
Recommendations by the Economic Strategies Committee
The Government of Singapore established an Economic Strategies Committee (ESC) in May 2009
to develop strategies for Singapore to maximise the opportunities in a new world environment with
the aim of achieving sustained and inclusive growth. The key recommendations of the ESC are as
follows:
• First, Singapore needs to boost skills in every sector by developing an outstanding nation-wide
system of continuing education and training to give everyone the opportunity to acquire greater
proficiency, knowledge, and expertise.
• Second, Singapore will have to deepen capabilities among Singapore companies to seize
opportunities in Asia. While the MNC strategy remains key, there is considerable opportunity in the
next five to 10 years to attract global mid-sized companies and to facilitate local companies to grow
into industry leaders in Asia. The ESC recommends measures to develop the market for cross-border
financing to help companies expand abroad with specific focus on reaping the commercial potential
of Singapore’s science and technology base.
• Third, Singapore must become a distinctive global city. The ESC is of the view that Singapore’s
future rests on growing a deep pool of highly capable and entrepreneurial people and it must
continue to attract top quality people from around the world, while investing further to provide the
best opportunities for Singaporean talents to grow and develop to the highest levels of expertise in a
range of fields. The ESC also recommends support for the growing creative and arts clusters, which
will add to the character of the city, and nurture new talents.
Tel: [65] 6239 7940
Tel: [65] 6530 6956
Market Analysis: Sri Lanka
Overview
Population
20.0 million
Total Area
65,610 sq km
Capital
Columbo
Major Language(s)
Sinhala, Tamil, and English
Time Zone
GMT + 5.5 hours
Currency
Sri Lankan rupee (LKR)
Central Bank
GDP
The Central Bank of Sri Lanka
capita (2009 est.)
4.6%
Trade
Exports f.o.b
Major Exports
USD7.4bn (2009)
accessories; coffee, tea,
mate and spices; rubber
and rubber articles;
precious metals; and other
commodities (2008)
Major Markets
(% of total)
Major Suppliers
US - 20.6%, UK - 12.9%,
Italy - 5.5%, Germany - 5.3%, (% of total)
India - 4.1%, Belgium - 4.4%
(2009)
USD18.2bn (2009)
Total Trade
Imports c.i.f
Major Imports
USD10.8bn (2009)
vehicles, parts and
accessories; fertilisers; and
India - 17.6%, China - 16.0%,
Singapore - 7.7%, Iran - 7.1%,
Korea - 1.8% (2009)
The Central Bank of Sri Lanka (CBSL) is the primary authority for the regulation of all banks and
financial institutions in Sri Lanka. As the central bank, CBSL is responsible for formulating monetary
policy, maintaining the stability of the country’s financial system and currency management.
The Sri Lankan banking sector accounts for 56.7% of the local financial sector in terms of assets.
There are 22 commercial banks, 11 of which are foreign and 11 local.
Under CBSL regulations, banks are authorised to operate offshore foreign currency banking units
(FCBU), which are free from exchange control regulations that are applicable to domestic companies
operating in domestic banking units (DBU). The FCBU scheme allows for foreign currency dealings
by non-residents and companies approved by the Board of Investment (BOI) – see the “Legal,
Company and Regulatory” section.
Documentation required for opening corporate bank accounts include identification documents
such as Business registration, Memorandum and Articles of Association, etc. to satisfy ‘Know Your
Customer (KYC)’ requirements and a Board Resolution/Secretary Certificate.
The following types of bank accounts are currently available1:
Account type
Local registered
Local current
Yes
Foreign savings
No
Yes
Local savings
Foreign current
Yes/Interest bearing No
(IB)
Yes/IB
Yes (FCBU)2
Local registered
with
BOI approval
Local registered
with
Export
Development Board
Local registered –
professional service
providers (FCAPS)
hoteliers
suppliers of material
input
shippers/airline on
behalf of parent
company
Overseas
registered
Yes
Yes/IB
Yes (DBU)
Yes (DBU)/IB
Yes
Yes/IB
Yes (DBU)
Yes (DBU)/IB
Yes
Yes/IB
Yes
Yes
No (but if opened Yes (DBU)/IB
under FCAPS, yes)
Yes (DBU)
Yes (DBU)
Yes
No
Yes (DBU)
Yes – non-resident
rupee account;
share investment
external rupee
account; treasury
bond investment
external rupee
accounts
Yes under special Yes (FCBU)
foreign direct
investment account
(SFIDA)
Yes (FCBU)/IB
No
Yes (FCBU or DBU
under SFIDA)/IB
1. Please note that these are basic account types that are guided by exchange control circulars.
2. FCBU accounts can be opened by companies incorporated outside Sri Lanka or by companies with BOI approval. In
the FCBU, accounts are not subjected to exchange control restrictions but must be maintained in approved foreign
currencies, which are Australian dollar, Canadian dollar, Danish krone, euro, Hong Kong dollar, Norwegian krone,
Singapore dollar, sterling, Swedish krona, Swiss franc, US dollar and yen. FCBU savings accounts would be in the form
of call deposits or time deposits only.
The Sri Lanka Automated Cheque Clearing House (SLACH) was established in 1988 and is
responsible for providing automated cheque clearing facilities. It has considerably reduced the time
required to clear local cheques and is at T+1, increasing the efficiency of the banking system. The
central bank manages and sets the rules for the country’s clearing system. Since February 2002,
SLACH has been operated by the private company LankaClear Pvt Ltd.
Interbank payments, such as money market, foreign exchange settlements and other bank transfers,
are handled electronically through the real-time gross settlement (RTGS) system. High-volume, lowvalue payments are routed through the Sri Lanka Interbank Payment System (SLIPS) and is T+0 and
at most T+1.
The Cheque Imaging and Truncation System (CITS) is the interbank cheque clearing system which
has been used by all commercial banks in Sri Lanka since April 2006. Inward clearance cheque
images and details are received from LankaClear (Pvt) Ltd (a company whose major shareholders are
the CBSL and two state banks) and loaded onto the CITS. The images and details are verified, and
respective customer accounts are debited. Outward clearance cheque images and details are loaded
onto the CITS and burnt onto a CD, which is sent to LankaClear at the end of the day. LankaClear
then performs the reconciliation based on the clearing rules set by the central bank.
Clearing system
Sri Lanka automated cheque
clearing house
Sri Lanka Interbank Payment
System (SLIPS)
Real-time gross settlement
(RTGS) system
Comments
The Sri Lanka automated cheque clearing house is responsible for
providing automated cheque-clearing facilities, which include cheque
imaging and truncation. It is managed by LankaClear. There is also a
system to clear locally issued US dollar cheques.
SLIPS is used for high-volume, low-value payments, although the
system can also handle larger-value interbank transfers as well. The
present threshold is LKR 5.0M
An automated clearing house operated by the TCH that is used to
settle low-value/hintral bank for settlement. The clearing time is two
days for debit transfers and one day for credit transfers, with funds
available on the next banking day.
Apart from the CBSL, another significant regulator is the BOI. Any foreign incorporated company
investing in Sri Lanka (or a Sri Lankan company making a large capital investment) can apply to the BOI
for Board of Investment status. This essentially grants these companies a host of tax incentives.
On the domestic currency (DBU) side, banks are obliged to levy a debit tax charge of 0.1% whenever
funds are transferred between two companies. However, this will be abolished on 01 April 2011 as
per the new budget directives. Cash pooling is offered in the FCBU and DBU as well.
In terms of restrictions on liquidity management, automatic sweeping of funds between accounts
is not permitted, while cross-currency and cross-border cash concentration is not feasible due to
regulatory constraints on foreign exchange conversion, and tax and accounting considerations.
Cash concentration facilities are available in Sri Lanka and debit tax is payable at present, but this will
no longer apply from 01 April 2011.
There are exchange control restrictions and the conversion of LKR to foreign currency for remittances
is permitted under specifically stated conditions and with supporting documents. Companies
registered with the BOI or foreign companies opening accounts in Sri Lanka are not subject to
these conditions when debiting foreign currency accounts in the FCBU. However, under the new
budget directives Exchange Controls have been relaxed in a number of areas, such as the ability of
foreign investors to invest in rupee denominated debentures issued by local companies, Sri Lankan
companies borrowing from foreign sources, foreign tourists and businesses opening foreign currency
accounts, Sri lankan residents investing in equities of foreign companies, etc.
Non-financial companies will pay corporation tax at 28% from 01 April 2011 (presently it is at 35%).
This excludes alcohol and tobacco companies who will pay 40% corporation tax from 01 April 2011.
Withholding tax is levied at 10% on all interest earned on deposits held in LKRs in a DBU account.
However if interest is being paid on USD balances, then withholding tax does not apply.
Market Watch
With the ending of the civil war the Government has undertaken a series of initiatives to double the
per capita income in Sri Lanka to USD4,000 by 2016 and develop the country into a regional hub for
Ports & Aviation, Knowledge & Education, BPO’s etc. The budget in November has set the stage for
a three year accelerated development plan which includes setting the right environment to encourage
foreign direct investment.
Sri Lanka has already relaxed some of its existing capital restrictions; for example, foreign investors
can now invest in LKR accounts with the ability to repatriate the funds. The authorities are
currently considering further relaxation of the remaining capital restrictions. There are restrictions
in the remittance of funds overseas that are permitted under pre-defined categories with specific
documentary requirements.
Tel: [94] (11) 479 3315
Tel: [94] (11) 479 3250
Market Analysis: Taiwan
Overview
Population
23.1 million (August 2010)
Total Area
35,961 sq km
Capital
Time Zone
Taipei
Putonghua (Mandarin), Taiwanese ( a Fujianese-based dialect), and
English
GMT + 8 hours
Currency
New Taiwan dollar (TWD)
Central Bank
GDP
The Central Bank of Taiwan
capita (2009 est.)
-0.5%
Major Language(s)
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD203.7bn (2009)
Electronic products; iron,
steel and iron/steel items;
optical, photographic,
measuring and medical
instruments; machinery; and
chemicals (2009)
China - 26.6%, Hong Kong
- 14.5%, US - 11.6%, Japan
- 7.1%, Singapore - 4.2%
(2009)
USD378.0bn (2009)
Imports c.i.f
Major Imports
USD174.4bn (2009)
Electronic products;
machinery; crude oil; metal
products; organic chemicals;
and iron, steel and iron/steel
items (2009)
Major Suppliers
(% of total)
Japan - 5.0%, China - 14.0%,
US - 10.4%, Korea - 6.0%,
Saudi Arabia - 5.0% (2009)
The Central Bank of the Republic of China (CBC) is responsible for monetary policy and foreign
exchange (FX) regulations, ensuring the sound operation of banks in Taiwan and exchange rate
stability.
The banking industry in Taiwan is currently undergoing considerable merger and acquisition;
specifically foreign banks have been active in acquiring local banks.
Documentation required for opening bank accounts in Taiwan is not particularly onerous and includes
standard items such as the company’s business licence and certificate of registration.
Account type
Local current
Local savings
Foreign current
Foreign savings
Resident
Yes
Yes
No
Yes
Non-resident
No
Yes
No
No1
Credit interest
No
Yes
No
Yes1
1. Restrictions on non-residents opening foreign currency savings accounts in domestic banking units apply.
There are three major local currency clearing systems in Taiwan: the cheque clearing infrastructure for
paper-based payments (TCCH), Financial Information Service Co. Ltd (FISC) and the automated clearing
house (ACH) for electronic payments:
Clearing system
TCCH
FISC
ACH
Comments
Local currency paper-based cheque clearing system, which is
operated by the Taiwan Clearing House (TCH) with three major
cheque clearing centres and 12 clearing branches throughout
Taiwan. For cheque clearing, the TCH uses magnetic ink character
recognition (MICR) technology in the clearing process. The process
is automated in Taipei, Taichung and Kaohsiung. Local cheques are
usually printed in Chinese. It normally takes two working days to clear
a cheque drawn in the same city, and five to seven working days to
clear a cheque drawn in another city. Post-dated cheques (PDCs) are
commonly used for payments as well as credit instruments, since
most local banks provide PDC discounting services.
A multi-purpose interbank electronic fund transfer system, developed
and operated by the FISC to allow banks to share common resources,
exchange financial information and implement the overall automation
of financial services. The system is Chinese character-based and
provides TWD same-day value interbank transfers. Included in the
FISC system are several other sub-systems, such as the shared cash
dispenser/automated teller machine system, Interbank Remittance
System, and the Financial Electronic Data Interchange System. The
most widely used system is the Interbank Remittance System, with
a total of 107 financial institution participants. FISC allows real-time
transfer of funds between client accounts maintained with banks. It
is used to settle all kinds of wire transfers, both low and high value.
An automated clearing house operated by the TCH that is used to
settle low-value/high-volume electronic payments in batches. ACH
allows for the direct electronic debiting and crediting of individual
and/or corporations’ banking accounts. Because of this feature, ACH
is normally used for payment/collection of utility bills, payment of
salaries, insurance premiums and cash dividends. Bank customers
send a list of account entry transactions to the originating bank for
processing. The originating bank then transfers the transaction data
to the TCH, which clears the debits and credits by the receiving
bank, then transmits the balancing statements to the central bank for
settlement. The clearing time is two days for debit transfers and one
day for credit transfers, with funds available on the next banking day.
Apart from the CBC, the other major regulatory authority is the Financial Supervisory Commission
(FSC), established in 2004 with a view to consolidating the supervisory responsibilities of banking,
securities and insurance sectors in Taiwan. The four bureaus under the FSC are the Banking Bureau,
the Securities and Futures Bureau, the Insurance Bureau and the Examination Bureau.
The main laws governing financial institutions include the Banking Act, the Securities and Exchange
Act, the Futures Trading Act and the Insurance Act.
TWD cash concentration services with savings accounts and current accounts with overdraft
facilities under the same entity or group entities are allowed, subject to regulatory approvals and
relevant restrictions. Only notional pooling in TWD is allowed by law.
In terms of restrictions on liquidity management, automatic sweeping of funds between accounts
is not permitted, while cross-currency and cross-border cash concentration is not feasible due to
regulatory constraints on foreign exchange conversion, and tax and accounting considerations.
TWD and foreign currency fixed-term deposits are the most popular investment instruments for
surplus liquidity. The tenor of these can range from one month to up to three years, or even longer
for TWD. For foreign currencies, tenors range from overnight up to usually a maximum of one year.
Simple interest is paid at maturity. A 10% tax is withheld from interest paid to residents while 20% is
withheld from non-residents.
Overnight deposits in TWD are not available (although they are available in other currencies) and the
alternative of bond funds is not popular due to credit risk considerations. Commercial paper under a
repurchase agreement (repos) is a popular instrument due to the flexibility in tenor.
A variety of regulations apply to FX:
• Under the CBC current FX regulations, settlement of foreign exchange against the TWD and vice
versa are categorised as follows:
– FX receipts from the export of goods or provision of services;
– FX disbursements for import of goods or services provided by non-residents; and
– FX receipts/disbursements from other sources, such as investments, capital repatriation and
dividends.
• Trade-related FX (categories 1 and 2 above):
– There is no limit to the amount of FX settlement against trade-related transactions, as long as the
supporting documents are provided to the FX bank at the point of settlement. Eligible supporting
documents include letters of credit, documents against acceptance/payment invoices and sales/
purchase contracts.
• Non-trade-related FX settlements (category 3 above):
– The limits for settlement of non-trade related foreign exchange are as follows:
Entity
Taiwan registered business
Taiwan individual residents
Settlement of FX receivables
USD50m
USD5m
Settlement of FX payables
USD50m
USD5m
Foreign nationals without an alien resident certificate and overseas entities not registered as
businesses in Taiwan are allowed to convert between TWD and foreign currencies but are subject to
a limit of USD100,000 or equivalent per transaction.
Under CBC regulations, withdrawals from current accounts can only be made by issuing a cheque.
All conversions of foreign currencies into TWD or vice versa are subject to CBC reporting and
declaration requirements. FX conversions of TWD500,000 or more must be reported to the CBC
by completion of a standard CBC declaration form. In the case of companies, the declaration form
must be completed with the company’s official seal(s). For corporates, supporting documents such
as invoices or the agreement or approval letter issued by the government are required when the deal
amount is in excess of USD1m.
The following is a summary of the rules governing corporates/institutions:
Amount
Less than TWD500,000
Less than USD1m
Equal to or larger than USD1m
FX declaration form
Not required
Required
Required
Supporting documents
Not required
Not required
Required
The detailed implementation of the basic FX/conversion-related regulations outlined above may still
be subject to CBC’s interpretations.
Corporate income tax in Taiwan is levied at 25%. There is a withholding on dividend payments of
20%. Interest paid on foreign currency deposit accounts opened by non-residents with an offshore
banking unit (OBU) – see www.banking.gov.tw/public/Attachment/4121316115771.doc – is not
subject to income tax. However, TWD accounts are not available from OBUs.
Market Watch
The government is keen to make Taiwan an attractive regional centre for multinational companies and to
that effect is reviewing the current tax regime.
Tel: [886] (2) 2723 0088 E-mail: [email protected]
Tel: [886] (2) 2757 2166 E-mail: [email protected]
Market Analysis: Thailand
Overview
Population
67.4 million
Total Area
513,120 sq km
Capital
Bangkok
Major Language(s)
Thai
Time Zone
GMT + 7 hours
Currency
Baht (THB)
Central Bank
GDP
The Bank of Thailand (BOT)
capita (2009 est.)
-1.2%
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD152.0bn (2009)
equipment; vehicles, parts
and accessories; jewels,
metals; rubber and
commodities (2009)
US - 11.0%, China - 10.6%,
Japan - 10.3%, Hong Kong
- 6.2%, Australia - 5.6%,
Malaysia - 5.0%, Singapore 5.0% (2009)
USD286.8bn (2009)
Imports c.i.f
Major Imports
USD134.9BN (2009)
iron and steel; jewels,
metals; and other
commodities (2009)
Major Suppliers
Japan - 18.7%, China (% of total)
12.7%, Malaysia - 6.4%,
US - 6.3%, UAE - 5.0%,
Singapore - 4.2%,
Korea - 4.1% (2009)
The Bank of Thailand (BOT) plays the role of the central bank in Thailand and is the key policymaker
governing the banking industry.
The regulated nature of Thailand’s banking industry allows the largest five local commercial banks to
dominate the banking and related securities, leasing and insurance businesses. There are a total of
58 banks operating in the country, comprising:
• 14 Thai commercial banks;
• Three retail banks;
• One subsidiary bank;
• 15 foreign bank branches; and
• 25 foreign bank representatives.
In 2004, BOT introduced the Financial Sector Master Plan, which included a “one presence policy”,
disallowing banks from owning more than one deposit-taking institution. This led to the closure
of international banking units, mergers of foreign banks into local banks, and upgrades of foreign
banks to subsidiaries. In July 2007, BOT announced that the second phase of the plan might include
allowing foreign banks to open more branches in five years’ time.
For companies registered outside Thailand, the documents required for opening a bank account
include the following:
• Board of directors’ resolution or letter of intention to open corporate account;
• Certified true copy of the company’s registration certificate;
• Certified true copy of the official document detailing particulars of directors and secretary;
• Certified true copy of the company’s articles of association;
• Certified true copy of the list of shareholders;
• Bearer share declaration form; and
• Certified true copy of passports of directors and all authorised signatories.
Account type
Local current
Local savings2
Foreign current
Foreign savings2
Resident
Yes
Yes
No
Yes2
Yes3
Yes3
Yes3
4
Non-resident4
1
1
2
Yes3
Credit interest
No
Yes
No
Yes
1. No restrictions are applied to residents opening THB accounts; Thai residents are discouraged from holding overseas
accounts. Approval from BOT is accordingly required, especially if deposits into those overseas accounts are made with
funds of domestic origin. It is rare for BOT to permit this unless it is proved necessary and allowed under the governing
act of the applicant.
2. For resident foreign currency accounts where the foreign currency originates from abroad, there is no deposit limit and
no need for documentation showing future foreign currency obligations. If the source of foreign currency originates from
within Thailand, deposit of such foreign currency can be classified into two types: with and without an obligation:
• For foreign currency deposits with an obligation, the deposit limit is USD100m. If residents deposit more than
USD100m, the obligation within a 12-month period must be presented. The deposit shall not exceed the obligated
amount.
• For foreign currency deposits without an obligation, the deposit limit is USD0.5m.
Any transfer and withdrawal shall be accompanied by supporting documents and reported.
3. No restrictions are applied to non-residents opening foreign currency or local currency accounts; however, funds for
non-resident foreign currency accounts must originate from abroad, otherwise approval with supporting documents
is required on a case-by-case basis. Cheque facilities are not available for non-resident THB accounts held in Thailand
because of the difficulty of BOT reporting requirements.
4. Funds deposited from resident to non-resident accounts must be accompanied by payment obligation documents
(evidence of obligation for service).
BOT operates five clearing systems in Thailand:
Clearing system
Electronic cheque clearing (ECS)
system
Comments
The ECS is used for processing and clearing cheques from
commercial banks in Bangkok and five adjacent provinces. It has
been in operation since July 1996.
SMART
(ACH credits and ACH debits)
Provincial cheque clearing
Cross Zone Upcountry Cheque
Clearing
(BC-3D)
BAHTNET is an electronic network linking users to BOT’s current
account system. BAHTNET participants are commercial banks,
specialised banks, non-bank financial institutions, and certain
departments of BOT. Settlement via BAHTNET is done on a realtime gross settlement (RTGS) basis. Usage is still limited due to high
commission charges.
SMART (System for Managing Automated Retail Funds Transfer)
is a retail funds transfer (credits and debits) system for transactions
occurring on a recurring basis. BOT is the centre for executing funds
transfers to any branch of all banks throughout Thailand. The system
provides interbank clearing for small-value transfers, including
payroll and dividend transfers on the credit side and payments of
household utility bills on the debit side. In late 2006, BOT changed its
policy by having its role as the “operator” (central switching centre)
assumed by a private company called National Interbank-Transaction
Management and Exchange (NITMX). NITMX will become the
central switching centre for SMART systems in Thailand, in order
to allow BOT to concentrate on its role overseeing the system as
the regulator. In October 2007, the SMART operator migration was
completed for credits. In July 2008, SMART credit same day went
live allowing customers to instruct same-day automated clearing
house (ACH) transactions. The live date for debits is yet to be
confirmed.
For provinces outside Bangkok, cheque clearing within the same
province takes one day at local clearing houses (managed by
commercial banks or BOT representatives) located in provincial
centres and some large districts. Provincial clearing house regulations
are based on agreement among members but do not differ from the
standard format. Clearing house operations have changed gradually
from a manual to a computerised system to increase efficiency.
Clearing of cheques deposited in the same province but paid in
different districts takes two to five business days, depending on
transportation and distance.
Cheques will be sent to the head office of the drawee bank, and the
head office of the issuing bank will process cheque clearing with
its branch within three business days upon exchanging the physical
cheque with the collecting bank.
In addition to BOT, another significant regulatory body is the Anti Money Laundering Office, which
serves as the financial intelligence unit for law enforcement agencies in Thailand.
In order to establish a limited company in Thailand, the following steps are required:
• Corporate name reservation;
• Three persons or more to act as promoters;
• Filing of a memorandum of association;
• Convening a statutory meeting;
• Registration; and
• Tax registration.
There are no minimum capitalisation requirements for companies incorporated in Thailand, but
BOT automated high-value
transfer network (BAHTNET,
RTGS)
capitalisation should be adequate for the intended business operation and in practice, at least
THB50,000 in registered capital is required.
Non–residents can open and maintain foreign currency accounts with authorised banks in Thailand;
however, as noted above, funds must originate from abroad.
Notional Pooling (both Domestic and Cross-Border) is permitted, but only Domestic Cash
Concentration is allowed. Cross–border cash concentration shall be allowed only if the company
concerned has obtained a treasury centre licence from BOT.
For Cash Concentration, Inter-company interest earnings will be subjected to special business tax
(SBT) of 3.3%, if lender and borrower have cross holdings of less than 25%, such stakes must be
held for at least 6 months before lending activities. All inter-company interest earning are subjected
to withholding tax (WHT) of 1%.
Popular local investment instruments for surplus liquidity include:
• Time deposits;
• Bills of exchange;
• Structured bills of exchange;
• Treasury bills; and
• Government bonds (e.g. bonds issued by BOT).
There are no explicit currency restrictions. However, some restrictions on currency hedging do apply.
For further information please consult the foreign exchange regulations on BOT’s web site.
Corporate income tax is levied at 30% of net profit and is due twice each fiscal year. A mid-year profit
forecast is used as the basis for advance payment of corporate taxes.
A value-added tax (VAT) of 7% is levied on the value-added at each stage of the production process,
and is applicable to most firms. It must be paid on a monthly basis.
A specific business tax, based on gross receipts, is levied on firms engaged in certain categories of
business not subject to VAT at a variable rate ranging from 0.1% to 3.0%.
Market Watch
In August 2008, BOT released guidelines governing banks’ use of electronic banking services.
All banks offering these services in Thailand must now comply with the guidelines, which cover
electronic funds transfer, security/internal controls and prevention of fraud.
BOT has issued the schedule for the release of the Image Cheque Clearing and Archive System (ICAS).
The roll-out will start in the Bangkok area in February 2010, with plans for the system to be used
nationwide in the future.
In Q3 2010, local banks agreed to the Bank of Thailand’s proposed revamp of electronic banking fees,
effective in the first quarter of 2011. Fees will fall across the board, with the exception of ATM fees.
The regulators wanted local banks to scrap all fees for inter-provincial transactions, with the whole
country considered a single area.
Tel: [66] (2) 614 4911
Tel: [66] (2) 614 4523
Market Analysis: Vietnam
Overview
Population
87.1 million
Total Area
331, 212 sq km
Capital
Time Zone
Hanoi
Vietnamese, with English, French, Chinese spoken widely in the
business community
GMT + 7 hours
Currency
Dong (VND)
Central Bank
GDP
The State Bank of Vietnam (SBV)
capita (2009 est.)
7%
Major Language(s)
Trade
Exports f.o.b
Major Exports
Major Markets
(% of total)
Total Trade
USD57.0bn (2009)
Imports c.i.f
Major Imports
and products; footwear and
related articles; apparel and
clothing accessories; fish and
other aquatic invertebrates;
(2008)
USD70.0bn (2009)
Mineral oils, and products;
iron and steel; electrical
plastics and plastic articles;
(2008)
China - 23.5%, Singapore US - 19.9%, Japan - 11.0%, Major Suppliers
(% of total)
6.1%, Japan - 10.7%, Korea China - 8.6%, Australia 10.0%, Thailand - 6.5%, US
4.0%, Germany - 3.3%
- 4.3%, Taiwan - 1.3%, Hong
(2009)
Kong - 1.2% (2009)
USD127.0bn (2009)
State Bank of Vietnam (SBV) is the sole regulatory and supervisory entity of the banking sector. SBV
operates throughout the country in 64 branches located in each city and province of Vietnam.
There are 5 state-owned commercial banks, 37 joint-stock commercial banks, 5 joint-venture banks,
48 branches of foreign banks and a social policy credit system. Foreign banks can enter Vietnam’s
banking sector by setting up a representative office, foreign bank branch, establishing a joint-venture
bank with a domestic commercial bank or taking ownership of up to 30% of shareholding in a
domestic bank.
Under CBSL regulations, banks are authorised to operate offshore foreign currency banking units
(FCBU), which are free from exchange control regulations that are applicable to domestic companies
operating in domestic banking units (DBU). The FCBU scheme allows for foreign currency dealings
by non-residents and companies approved by the Board of Investment (BOI) – see the “Legal,
Company and Regulatory” section.
Documentation required for opening corporate bank accounts include identification documents
such as Business registration, Memorandum and Articles of Association, etc. to satisfy ‘Know Your
Customer (KYC)’ requirements and a Board Resolution/Secretary Certificate.
The following types of bank accounts are currently available1:
Account type
Local current
Local savings
Foreign current
Foreign savings
Resident
Yes
Yes
Yes
Yes1
Non-resident
Yes1
No
Yes
Yes
Credit interest
Yes2
Yes
Yes
Yes
1. While non-resident organisations operating in Vietnam can open Vietnamese Dong (VND) accounts, non-resident
organisations operating offshore can open Vietnamese Dong (VND) accounts but transactions are restricted and
supporting documents required.
2. Subject to approval of local managers.
CITAD is the country’s payment clearing system and is run by SBV. Since 5th April 2008, CITAD has
been operating with two value categories. Low-value clearing is classified as any transaction with a
value below VND0.5bn, with anything at or above that threshold being classified as high value. The
cut-off time for low-value payments is 3:00pm and high-value payments at 3:45pm.
Low-value clearing charges on a fixed-fee basis, while high-value charges are levied ad valorem.
Both value categories operate on a same-day value.
Cheques are not generally used in Vietnam, so the country has effectively moved directly from using
physical cash to same-day transfers for local currency clearing. As a result, the clearing environment
is particularly efficient from a cash management perspective, with fast collections/payments, less
paperwork and fewer manual processes.
Under Vietnamese regulations, payments made by organisations using state-owned funds of a value
equal or greater than VND30m should be made by bank transfer.
Cash Management Solutions at a glance:
Investment Product1
Local currency/ foreign
currency statement
savings
Time deposits
Treasury products:
• Swap
• Forward
Transaction Management
Payments
Collections
Fast cash collection via
Demand draft (FCY)
local partner banks
Cheque (LCY) (not
Cheque collection
popular)
(overseas cheque
Payment order
collection is offered on a
Bulk payment
Telegraphic Transfer (TT) case by case basis)
USD Cash Letter
Electronic payment
On-site cash collection
Payroll service
Cash deposit
Standing Instruction
Inward telegraphic
Cash withdrawal
transfer
AutoPay-out (applied
Direct Debit (via alliance
where both payor
banks)
and beneficiary have
Bulk collections
accounts at HSBC)
Inward foreign currency
Payments Advising
XCS (Xpress Collection remittances
Services) (payment dox) Bills Payment Facility
(ATMs, Internet Banking)
Liquidity
Management1
Notional Pooling and
Cash Concentration are
offered on a selective
basis
Working capital financing/
credit lines
1. Cash management services are delivered via HSBCnet, HSBC’s electronic banking systems.
Payment Capabilities and Cut-off times
Electronic Payments
RTGS
GIRO/ACH
Payroll
International Funds transfer
Yes
Yes
Yes
Yes
14:00
14:00
14:00
14:00
Paper Payments
Local Currency Foreign
Cheque
Currency
Domestic
cheque
Yes
Yes
14:00
14:00
Bank Demand
Draft
Petty Cash
Cheque
Outsourcing (via
HSBCnet)
Yes
14:00
No
N/A
Payment
Advising
Yes
Yes
branch hours
In addition to State Bank of Vietnam (SBV) and the Ministry of Finance, the Ministry of Planning and
Investment plays an important regulatory role in matters such as the issuing of investment licences,
etc.
Thin capitalisation rules apply. Wholly owned subsidiaries of foreign companies can only borrow up
to the investment capital approved in their investment licence (issued by the Ministry of Planning and
Investment) with a medium to long term tenor.
Different company licenses will allow different scopes of business activities. A representative office
license has the highest restrictions vis-à-vis wholly owned subsidiaries of foreign companies, which
have more latitude. Joint stock companies with a local partner that holds majority shareholding
provides the widest degree of flexibility for foreign entities as they are able to operate almost at the
same level as a local company.
In some cases, foreign companies may be required to establish a company bank account in Vietnam
first as the details of the bank account are required to be submitted as part of the information in the
business registration process.
In general, the regulatory environment in Vietnam can be complex and is constantly evolving, so
taking professional advice in advance of any action is advisable.
Overdrafts are permitted in Vietnam, so there is some leeway for notional pooling and /or cash
concentration services. However, this is only permitted in local currency (VND).
All US dollar (USD) activities are monitored by the regulators and transfers require supporting
documentation. Therefore, US Dollar transfers between accounts is not straightforward.
Term deposits are commonly used as instruments for investment of surplus liquidity. Tiered credit
interest rates on current accounts are also popular.
All foreign loans and overseas borrowings over 12 months tenor must be registered with SBV.
More enterprises are now using other major currencies e.g Euro, Sterling, Yen, etc. as it is perceived
that dollar (USD) currency trade is being restricted.
Market Watch
The Vietnamese government has become far more particular about supporting documentation for
foreign currency outward remittances. In the past it was relatively easy for corporations to buy USD
to pay dividends or to make payments to suppliers offshore. Supporting documentation showing the
underlying commercial transaction must be provided to the remitting bank prior to remittance.
For a client buying foreign currency to settle an invoice, banks can only sell the client the foreign
currency mentioned in the invoice; unless there is a clause in the client’s commercial contract stating
that both buyer and seller agree that payment can be made in a different currency.
This requirement for supporting documents is currently creating bottlenecks for banks as it takes
more administrative time than was anticipated.
In a statement found on the Central bank’s web site, SBV sets limits allowing banks a maximum of
30% of short-term funds for offering medium- to long-term loans. The restriction is aimed at ensuring
stability of the banking system.
On 24 March 2009, the government increased the USD/VND trading band from +/–3% (set on 7
November 2008) to +/–5%.
Tel: [84] (8) 829 2288
Tel: [84] (8) 520 3342
E-mail: [email protected],vn

Thanks for

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