When introducing the Corporate Forum, SWIFT’s head of corporate market, Elie Lasker, explained that this stream was designed specifically for corporate participants, in an attempt to dispel the idea that Sibos is solely about banks talking to each other.
Lasker started the session on the second day of Sibos 2012 by looking at key milestones and opportunities for SWIFT for Corporates. SWIFT membership now boasts more than 1,000 corporate clients; over a quarter (26%) of multinational corporations (MNCs) with US$10bn or more in revenue use SWIFT connectivity. Those clients are then connected to an estimated 40,000 entities. Lasker believes many more MNCs, particularly those within the US$1bn-US$10bn bracket as well as mid-caps, can benefit from connecting to SWIFT because it makes processes easier, improves standardisation and enriches trade.
SWIFT’s head of trade and supply chain, Andre Casterman, said that the scope of SWIFT for Corporates has grown, particularly as corporates have increased the number of banks used in some markets and increased centralised processing. SWIFT is helping to offer multi-bank solutions by dematerialising paper and manual processes. It has also been extending standards to trade flows, especially by introducing a series of MT 700 messages. New instruments, such as the bank payment obligation (BPO), also digitise trade flows and remove paper that slows down physical trade.
Global Trade: Asia
Boston Consulting Group (BCG) partner, Michael Guo, looked at the key corridors for global and Asian trade. He expects that total global trade will double by 2020, transaction revenue will grow 80% and open account revenue will triple. New trade corridors are emerging as Asia’s economic centre shifts, Guo said, with China and Singapore replacing Japan as the most important trade corridors in Asia.
Within Asia, small and medium-sized enterprises (SMEs) are especially important for trade. In China, for example, 78% of exports will be driven by SMEs by 2013. Another trend in Asia is the increasing importance of commodities, which is predicted to grow from 24% of global trade in 2001 to 35% in 2030.
To support that trade, Guo said, corporates are demanding that banks go back to basics and provide bread and butter services, including:
- Real-time cash transparency.
- Stronger relationships.
- Diverse solutions that cater to local needs.
Guo identified key levers for banks to capture growth: grab the SME opportunity, follow their clients, increase product innovation, integrate trade finance with cash management, and develop a platform strategy to support growth.
BCG partner Tjun Tang then moderated a panel focused on the implications of global trade flows with global BP Chemicals credit manager, David Vermylen; HSBC’s head of trade and receivables finance, James Emmett; Commerzebank’s board member Christof Maetze; and Indian Banks Association’s (IBA) chief executive officer (CEO) Ramakrishnan Krishnamurthy.
HSBC’s Emmett said that trade is dominated by the emerging markets, and there is tremendous growth in intra-Asia trade. As Asian trade grows from 20% of global trade to 35% by 2030, there will be a significant shift of trade patterns and over 50% of trade with China could be in renminbi (RMB) by 2015. South-south trade is one of the transformational flows, he said. And even in the manufacturing story that is China, factories are moving inland and also elsewhere, such as Bangladesh or Vietnam. Brazil-China and India-China flows are also growing.
Commerzbank’s Maetze said that while there was talk about protectionism hindering trade, protectionism has not risen. And while the relative weight of trade will change, even in 2020 Europe will account for 40% of global trade. Maetze said that key demands from corporates are for banks to go back to basics, support them on a worldwide basis and offer RMB funding.
Krishnamurthy from IBA added that corporates expect bankers to be professionals in providing lending, borrowing, advice and market linkages for products. Bankers need to go beyond their world of products in order to be a true partner and help corporates locate growth markets or recover their receivables. Bankers can also play a role in educating and supporting entrepreneurs.
BP Chemical’s Verymylen said that his company is looking for a bank that grows with the company, operates in many markets, has a good credit rating, and offers innovative multi-bank solutions. Customers want products that work, he said, and not just lots of people working with them.
Internationalisation of the RMB
KPMG’s Egidio Zarrell led a panel discussing the internationalisation of the RMB, with representatives from JP Morgan, Bank of America Merrill Lynch (BofA Merrill), Standard Chartered Bank and Mizuho Corporate Bank.
RMB internationalisation important in part because China’s trade is so large, they said, but there are other reasons as well. Companies in China can get approval for RMB investments faster, with some companies getting approval in three weeks, compared with six months for US dollar investment. And trading in RMB reduces cycle time by seven to 10 days, which can result in a 2%-3% cost saving.
One panellist said that there may be no reason for using the US dollar as a settlement currency in Asia, as the importance of Asian currencies is growing. And while the RMB was originally positioned as a settlement currency and then as an investment currency, another panellist noted, there is no expressed intent to have the RMB as a reserve currency. The idea is that there may eventually be several reserve currencies, not just one.
In deciding whether to use the RMB for trade, corporate treasurers should decide what the right answer is for their organisation. Questions will often begin with the Chinese exporter or the company’s office in China.
Given the likely increase in usage of the RMB, it is important for corporates to prepare in advance to use the RMB. One key part is evaluating whether there is a fundamental need for the currency. Another key part is to look at the treasury management systems (TMS) to make sure they can handle RMB. And to make it easier, RMB doesn’t need to displace the US dollar, since the final leg can always be made in the home currency for the head office.
While RMB regulations are still evolving, the Chinese government is learning and receptive to input. The regulators at the Chinese central bank have serious commercial intent, and they’ve acted on previous feedback. They launched pilots in mid-2012, for example, that simplified documentation to just a payment and collections form.
Trust and transparency of the RMB, the panellists said, is the biggest challenge to corporate adoption of the RMB. It’s not about how much it will cost to redo the enterprise resource planning (ERP) system. Instead, it’s the “hard wiring” that exists with the corporate treasurer. Companies need to be able to convince their client to try a first transaction. Then, there must be a mutual benefit, with the exporter passing on some of the benefit to the buyer. Companies will then likely see more transactions.
Transaction and Liquidity Management in Asia
Next up a panel of corporates and banks discussed transaction and liquidity management in Asia, including: Johnson Controls’ director of finance engineering, Wolfgang Ratheiser; Acarate Consulting’s director and former Huawei treasurer, David Blair; Sumitomo Mitsui Banking Corp’s general manager, Toshihiro Manabe; and ICICI’s head of commercial banking Lok Mishra.
In looking at how to cope with the challenges posed by different regulations and standards in different countries, Ratheiser said his company focused on choosing the right partners with the right technology and funding. Johnson Controls initially chose a bank agent to help gain greater visibility over cash and its requirements, and it now has global visibility over all its bank accounts. It is also becoming bank independent, so it can have better control.
Blair from Acarate Consulting said the three main challenges to cash visibility are banking infrastructure, regulatory and taxation. Visibility, he added, means the treasurer can see the balances of all bank accounts around the world. The banking infrastructure is critical to visibility, and electronic reporting is also critical. Most Asian banks have electronic banking (e-banking) of some kind.
From a banking perspective, ICICI’s Mishra said that when a bank is trying to be an efficient transaction bank, it needs to see the visibility of funds and the infrastructure move up to a higher level. The key is how to put it in the system and have visibility across banks. It’s particularly important in Asia, since there are capital control regulations that limit fund movements and the ability to have a central pool account.
To move cash, Ratheiser said, it is critical to understand local regulations. In Asia, government authorities sometimes have contradictory regulations even in the same country. On the one hand that’s cumbersome, he said, and on the other hand it can be fun because treasurers have the opportunity to find solutions. His company has also worked to build relationships with government and find their way through the different regulations. Blair added that the other solution is to educate local staff who have been doing things in a certain way for a long time, even though regulations may have changed.
From the bank’s perspective, Sumitomo Mitsui’s Manabe said, even if regulations allow you to do something you need to be very careful about tax and other issues. Mishra said it’s also important for MNCs to have a reasonable level of local talent, so they can understand local conditions better.
For Ratheiser, a key focus is standardisation. ISO 20022 helps standardisation, and by using SWIFT he was able to drive it through his whole organisation. His company has worked with SWIFT to make sure the rulebook is the same everywhere, with minimal exceptions.
Manabe said that Common Global Implementation (CGI) is also important. Banks receive many files and formats from corporates. They need to have standardised files, country by country, so collaboration with corporates and banks is important. Blair added that CGI is deciding which field to use for each local market and how to use the existing technology so everyone uses the same field.
Ratheiser said that SWIFT, banks and corporates all need to work together on standards so they can improve efficiency and increase visibility of cash. He added that standardisation also drives down the cost of technology, and companies are relatively inefficient now because they don’t have standards.
Supply Chain Finance for Corporates: Another Bite at the BPO
Daisuke Kamai, services and products deputy, transaction banking, Bank of Tokyo Mitsubishi UFJ, joined the SWIFT for Corporates session and explained how the bank provides bank payments obligations (BPOs).
Corporates want to reduce documents, but banks want to maintain the letter of credit (L/C) business because they get a lot of information. The challenge is how to provide new efficiency without losing business information. The bank offers BPOs, which can reduce documentation and still provide the same level of information.
The basic product involves payments based on Trade Services Utility (TSU) data matching. Electronic management means there is no manual checking and automated data matching is faster and more accurate. The bank still guarantees payment of the importer, based on data matching, and it also offers BPO-based finance – it just doesn’t use actual paper documents. The fees, he said, are similar to L/Cs.
For the corporate, the processes don’t change. On the L/C side after the shipment, the exporter will prepare the documents, the bank will check them and then send them to the importer’s bank. Settlement times have been reduced from about 10 days to three.
Ito Yokado, the largest retailer in Japan, uses BPOs. The retailer said it uses the product to support their exporters so they can get better trade terms and more flexible trade. This means they can optimise their working capital. Ito Yokado found that benefits include earlier fund collections, easier trade and payment. The benefits for the bank include lower costs, higher revenue, shorter transaction times and stronger core relationships.
Building Future-proof Operating Models in Wholesale Transaction Banking
In a shift in focus, a session near the end of the day looked at new models for transaction banks.
BCG partner Niclas Storz opened the session with an overview of the industry. It is a stable, low capital, high profitability margin which maintains steady growth, he said, with expected growth of 170% by 2021 and forecasted revenue pool US$509bn. While 20%-25% of revenue is from Asia today, Asia will account for half of the revenue in the future.
Storz said banks should use a three-part model in transaction banking:
- First, banks should start by focusing on the business model: products, channels, regions and target customers.
- Second, is the operations model, which includes the process model, locations, sourcing and the IT architecture.
- Third, sitting in the middle, is the organisation structure, governance and HR.
He sees three common reasons why transaction banks could fail. One is undifferentiated coverage of customer segments, the second is missing out on customer requirements such as solutions to daily problems, and the third is that they can’t scale their business.
There are two paradigms in the industry, Storz said. One is flexibility, with innovations and tailored solutions that react to requirements of customers. The other is a design-to-cost philosophy with pure standardisation and no exceptions. Most banks try to get the best of both, he said, by offering innovative products and at the same time trying to offer a scalable model.
To be successful, Storz said, banks need to start with excelling in standard solutions and being prudent in innovations, since most customers are looking for plain vanillas solutions. The second building block is coverage, which means enhancing front-line expertise. The third is a multi-local model rather than a global set-up. Next is to reduce complexity in IT architecture. And finally, Storz said, good governance is critical for a transaction bank.
Transaction Banking Options
BCG senior partner Stefan Dab then led a panel discussion with Banco Santander’s head of cash management and financial institutions (FIs), Carlos Gutierrez-Salan; DBS Bank’s head of global transaction services (GTS), Tom McCabe; Citi Transaction Services’ (CTS) managing director Bharat Sarpeshkar; and BNY Mellon executive vice president (EVP), Susan Skerritt.
Asked how to balance cost and flexibility, Santander’s Gutierrez-Salan said the start is a strong customer segmentation model that also aligns product and sales. More big multinationals are asking for more standardisation, he said, since they want flexibility to change providers and the only way to do that is to use standards. BNY Mellon’s Skerritt added that differentiation can be based on products, so banks can have both scale and flexibility.
DBS’ McCabe said the critical aspect is getting CEOs and investors to recognise the value in transaction banking revenue streams. Transaction banking has a high return on equity (ROE), often six to eight times as much as other parts of the bank, and increasing the perceived value of transaction banking can increase the price-earnings (PE) ratio. Heads of transaction banking need to communicate that value more distinctively.
Innovation is a key part of adding value, and Skerritt said that BNY Mellon looks at innovation differently than many banks. It defines innovation as any change that benefits the bottom line, whether it’s game-changing or an incremental change in process. If you define innovation that broadly, she said, you can engage all of your employees to be innovative and not just ask them to come up with game-changing ideas. Her firm has generated tens of millions of dollars in revenue, she added, because it has that type of innovative culture and employees respond to client needs.
Sarpeshkar from Citi said there is a mistake around the technology. The internet became just a massive enabler instead of getting banks more productive and delivering better value. Mobile and social media, he said, are an opportunity to make the client experience more enriching. While the underlying services in transaction banking haven’t changed much in the past 50 years, these technologies can help make life simpler. Banks spend far too much energy putting in bells and whistles, he said, and miss on where they can really bring value.
BCG’s Dab then asked whether regulation will just add cost, or whether it will change the way banks do business. Guiterrez-Salan responded by saying that Basel III is bringing in pressure on capital and returns, which will bring competition and put pressure on pricing. It will also change the customer buying behaviour, once customers realise that transaction banking has more value to the banks.
There are two important regulatory developments, according to Sarpeshkar. First is Know Your Customer (KYC)/Anti-money Laundering (AML), which reflects a desire to restrict the illegal flow of funds. However, the amount regulators expect the banks to do has increased almost five-fold. The downstream impact on cost will force the consolidation of banks.
Second, Basel III has two important impacts. One is the rules around trade and the favourable capital treatment, which will force some consolidation. The other is on bank-to-bank financing, which is a major source of liquidity. Pricing will rise as banks that have compensated each other through corresponding deposits find the deposits are worth less, due to ratio requirements. Fee structures will change and costs will be passed to middle-market customers.
Skerritt added that the costs of regulation are going to be significant and it will impact the way banks work. Dodd-Frank 1073, for example, could be very insidious. When banks start providing more information to consumers, SMEs will want the same thing and the price transparency could change the way banks do business.
The Corporate Forum offered a multitude of insights on how corporates can increase efficiency and take advantage of new tools. gtnews will be there when the Corporate Forum continues on Wednesday, to seek and report on additional insights for corporates to run their business better.
Please click here to read Sibos 2012 Blog 1.
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