Amitabh Verma examines new cash management systems that minimise risk while encouraging country-to-country business growth.
Finding solutions for cross-cultural cash management
The past few years have seen a discernible shift from an era where corporates have sought to contain risk, to one where they are seeking new opportunities. Does this movement reduce the focus on risk? No. On the contrary, the corporates' focus on risk has increased as companies target emerging opportunities that have enhanced controls. However, while balanced targeted growth is ideal on paper, it is difficult implement. Hence, corporates are also looking increasingly towards technology and cash management in order to continue delivering superior returns to their shareholders.
The business landscape is also changing opportunities today are no longer restricted within geographical boundaries. In his book Borderless world: power and strategy in the interlinked economy (HarperCollins, 1999), Kenichi Ohmae wrote about the diffusion of geographical boundaries in economics and this is happening at an accelerated pace. With the erosion of geographical boundaries comes an increase in opportunities. One particular area of interest to many corporates is the integration of business opportunities between India and Southeast Asia.
There are many reasons to look for synergetic opportunities between India and Southeast Asia, one of them being the growth of the Asian economies. Although companies have traditionally sought business opportunities with the more developed West, they are beginning to realise and tap the immense potential within Asia.
As companies integrate or expand their business across geographical boundaries, however, they face numerous challenges. These include having to deal with local financial systems in the destination countries. For example, a company that is used to using the giro system in Singapore will realise there is no equivalent system in India. Rather India's payment systems, such as the national electronic funds transfer (NEFT) system and the electronic clearing service, are at a different stage of evolution. It is therefore, an important and often difficult task for companies to find the right banking partner who has requisite knowledge of financial transactions in both economies, and who is able to make comparisons between the different markets.
Meeting complex cash-management needs with simple solutions
Over the past few years, cash management has evolved to become a technology-driven function with integrated electronic banking channels that allow for convenient, fast, efficient and effective transactions with enhanced controls at a competitive price. This provides, among other things, visibility of accounts over different geographies, and enables seamless transactions from any location, and easy reconciliation at significantly enhanced levels of security.
Simple electronic banking solutions are moving towards more complex and customised solutions to improve efficiency and mitigate the growing risk that arises as corporates, for example, move towards settling trade transactions on open account terms. Integrated electronic banking channels provide real-time information that is extremely useful in mitigating such risks. Integrating electronic banking channels with clients' enterprise resource planning (ERP) systems has many benefits, which range from easier operations to allowing input of more complex data for decision making. These features are accelerating a trend towards more complex integration solutions, such as server-to-server connectivity between a client's and a bank's systems.
Clients are able to free scarce resources from non-core activities and outsource them to banks specialised in handling activities such as issuing cheques at much lower costs. Banks that possess a unique mix of having local knowledge of different geographies, and the right technology and people, have the expertise that provides significant benefits to corporate clients.
Case study: How cash management can support cross-border business
Here we take a look at how cash-management banking solutions can help support a company's business in another market. The case study illustrates how DBS Limited is able to fulfil the banking needs of a Singapore-based company that is expanding into India.
A Singapore-based entity (company ABC) has domestic operations in Singapore and its local banking needs are met by DBS. All the company's banking transactions are reported through DBS IDEAL, the bank's corporate internet banking channel. The company has identified opportunities in India and intends to expand its business there. It sets up its main Indian office in Mumbai (company XYZ) and opens smaller offices in other cities such as New Delhi, choosing to open bank accounts also with DBS. All information on accounts opened in Mumbai and New Delhi will then also be available on DBS IDEAL. The company can conveniently view and manage all its accounts through one electronic banking channel.
In India, the company needs to make payments for purchased raw materials. Using DBS IDEAL, it can choose to initiate payments from Singapore or India either:
electronically: using real-time gross settlement (RTGS) for high-value urgent payments, NEFT for vendor or salary payments, and the like or:
using paper-based instruments, such as drafts or cheques, which are predominant forms of payment in India
Payments can also be initiated manually based on company XYZ's preference. The key element is in ensuring the security of payment transactions and the confidentiality of information. DBS uses 128-bit secure socket layer encryption technology to encrypt and transmit data.
To facilitate payments reconciliation, details of the transaction (for example, the unique transaction reference number for a RTGS payment or the cheque number for a cheque payment) can be relayed back to company XYZ and ABC for easy reconciliation. Customers can choose to integrate the data transmission and receipt function for simplicity and efficiency. This also eliminates errors that arise during manual reconciliation.
Trade transactions involving cross-border payments can also be facilitated using the platform within the exchange control guidelines prevalent in India.
Assuming that company XYZ also sells its products across different cities in India, it will need to receive the funds at its Indian head office. Through its network of correspondent bank branches, DBS is able to facilitate local cheque pick-up and clearing across more than 500 cities, and to provide comprehensive management information service (MIS), to both the Singapore and India offices through its internet banking channel. This includes simple information, such as when the cheques were deposited and cleared, to more detailed reports, which indicate whose cheques are getting returned, at what frequency and how long these cheques remain outstanding.
This information provides company XYZ with useful insights into the payment behaviour of its dealers and customers, and enables the company to deal with them more effectively. Through DBS IDEAL, the reports can be integrated with the company's ERP system for easy, customised reconciliation, and funds can also be quickly collected and pooled to the central account.
Should the company want to enhance the yield on surpluses, they can further invest their funds into yield-enhancing products, such as term deposits.
The entire range of transaction banking requirements can be met by a single bank, as illustrated, and the entire chain can be tailored in its visibility to the customer through an electronic banking platform to meet the requirements of the company.
This transaction banking relationship can be further extended to the company's other banking needs such as factoring of invoices, loans and other trade transactions, subject to the company meeting the credit guidelines of the bank.
Providing local expertise to regionalising corporates
Businesses will grow wherever there are opportunities. It is imperative for service providers like banks to provide cost-effective solutions that meet the efficiency and control requirements of increasingly savvy corporates.
Cash management has spearheaded and clearly illustrated the benefits for corporations of having integrated transaction solutions, with a growing trend towards being able to customise the solution to the specific needs of each corporate.
Singapore has the distinction of being an international business hub in Southeast Asia, while India boasts a rapidly growing economy with sustainable growth; and a growing number of companies in these two countries are conducting business with each other.
Growth in business activities between India and Singapore provides unique opportunities for Asian banks that can offer local expertise to regionalising companies that are aiming for balanced targeted growth.
