Treasury Today Country Profiles in association with Citi

Cash and trade: a common sense convergence

Ship in Norway with beautiful mountain background

The convergence of cash and trade is a topic that banks have been promoting over the past 18 months, prompting the accusation that it is simply a marriage of convenience. However, with the treasury function working closer than ever before with departments such as sales and procurement, comprehensive bank solutions can offer real value.

There is a genuine logic to the convergence of cash and trade from a corporate perspective. If you are a corporate treasurer, do you care most about how your bank is organised or what solutions they can provide you with? The solutions are king, and banks are slowly moving to recognise this by bringing different product organisations such as cash management and trade under a common umbrella. For the banks, this provides a leadership that can actually mediate between two sales organisations, and eventually two product organisations, to work collectively and collaboratively to deliver the best possible value-added solution to the corporate.

The drive for cash management and trade groups within banks to collaborate and devise solutions for the client is not purely a sales construct, but is also being seen on the end-user technology platforms, according to Michael Spiegel, Head of Trade Finance and Cash Management Corporates, Deutsche Bank. “One of the things that we have done at Deutsche Bank is to take an established e-billing platform, which existed in the cash management world, and electronically integrate some of our trade platforms and delivery mechanisms, creating a financial supply chain portal,” explains Spiegel.

The corporate background

Within the corporate, there is a similar overlap of cash and trade issues, although not the same overlap of groups or responsibilities that are found in most banks. Corporates have trade flows, but do not really have a trade department. Depending on the size of your organisation, you may have a credit function that deals with concerns such as counterparty risk. You can also add to this the sales functions, treasury and the shared service centres that actually process and initiate payments, but still there is no one department responsible for all trade issues. Despite this, most corporates do have a procurement department buying items and stock and, as mentioned, a sales department. Both of these departments remain independent from the treasury function. But this independence aside, there is now a trend for treasury to work in a much more collaborative way with both, driven by the economic uncertainty that arose in 2008 and still exists in many markets today.

The first liquidity crisis of 2008 spilled over into the corporate world, typically hitting medium size and smaller companies harder than larger multinationals. This led larger companies to become more aware and concerned about the viability of both their suppliers and distributors from a liquidity perspective. To ensure the liquidity position of their suppliers and distributors, large corporates were faced with the options of either giving them the cash themselves, or to work with financial partners to look at supplier financing or distributor financing. The purpose of doing this is to optimise their own working capital and net working capital position, but also to ensure that their partners in the supply chain have sufficient liquidity to stay in business.

While corporates do not integrate their cash and trade functions in an organisational structure sense, there is much greater collaboration between the different corporate departments around the two issues. “The broadening of risk within cash and trade has become more of an enterprise risk, as it looks at the enterprise of the corporate as a whole within a given supply chain, rather than only at the internal risk on their direct balance sheet. With this development, and an increasing awareness, we see more collaboration across the different functions within a corporate,” says Spiegel.

Collaboration, not integration

As touched upon already, corporates are not integrating their cash management and trade functions into one catch-all department, but rather treasury is collaborating more with other business units.

The drivers highlighted in the previous box mean that the treasurer has greater influence over the trade part of the supply chain. For example, as the nature of the destination of imports and/or exports has changed for companies through the crisis, some have found themselves moving towards markets where they need to use letters of credit (LCs). This is a reversal of the trend in recent years that in many regions had seen LCs phased out in favour of open account trade.

As such, many corporates have been finding that they do not have the skills base and/or talent within the organisation to handle the increase in LCs, and so they have begun outsourcing. In fact, there are a handful of multinational corporates who have actually outsourced the trade document preparation to either banks or third parties. So, the experience that treasurers have gained from their outsourcing or shared service centres in the cash space is now beginning to be applied in the trade space.

Additionally, as the importance of trade increases within the corporate organisation, along with working capital and risk, there is also a lot more treasury policy around the trade area. There is also more usage of the accounts payable (AP) and accounts receivable (AR) data on the trade spectrum as it is increasingly built into the cash flow forecasting of the company.

Four key reasons that the treasurer is more involved with trade
  1. With the credit crisis, the need for trade in the overall mix grows. New trade corridors – such as those between China and Africa, the Middle East and India – have meant that trade has a bigger role in a treasurer’s life.

  2. Bank relationship ownership – most treasury departments have evolved to own the organisation’s bank relationships. They have therefore taken charge of negotiating new trade facilities as the nature of, or destination of, trade changes. Starting new trade corridors requires new trade facilities.

  3. The treasurer has a lot more interest in, and more responsibility, over working capital. This control over working capital has led to the treasury function being more ‘intimate’ with the sales side and the supply side of the organisation.

  4. In many organisations, the procurement function and the treasury function have become very close, which further enables the treasury department to focus on the supplier side.

An easy ride?

Aside from potential project ownership clashes that can occur from time-to-time when different people in charge of different functions work together, what other challenges do corporate treasurers face when operating with more trade issues in their portfolio?

The current organisational collaboration is not a hard-wired integration, which can cause problems. Whenever there are terms negotiated, it is very much within the commercial arm of the corporate. So while there is an ‘integration’ to some extent in terms of the operations, there is much less integration on the organisational side. The treasurer hasn’t taken over the commercial flow which sits in the export or import manager’s area.

However, the supply side is much more ‘integrated’, as treasury has always been involved in the last leg, the payments part of the chain. Today, treasurers are even more involved in the process as they get deeper into the supply chain area. While this provides diversification in the treasurer’s role, it also means more work.

In terms of the bank concentration and counterparty risk, it is natural that banks providing cash management for a corporate also partner with them on trade. But then you also need to look at credit limits, as some of that business tends to get directed by which bank has given the corporate its trade finance facilities.

While this may not have an effect on counterparty risk, Rajesh Mehta, EMEA Head of Treasury and Trade Solutions at Citi, sees it is an area that has seen much geographical change recently. “Traditionally strong European trade finance organisations are, with their capital and liquidity constraints, backing off somewhat, and I think you’ll see some moving around of that trade business from the European banks,” explains Mehta. For the treasurer, this may mean that bank relationships will need to be re-evaluated, taking into account the trade piece.

And what of the treasurer’s eternal challenge, cash flow forecasting? Has closer collaboration with other departments assisted? According to Martin Knott, Head of Trade, Global Treasury Solutions, EMEA at Bank of America Merrill Lynch, accuracy of forecasting remains a challenge, especially across the whole enterprise. “While technology has been an enabler, cash flow forecasting continues to be reliant on available data. The higher the quality of data input, the more accurate the output and therefore forecast. It has however gained an increasing importance over recent times, with available liquidity being a key concern to treasurers,” says Knott.

Corporate drivers of convergence

The saying goes that nobody should waste a good crisis, and treasurers have worked hard to use the working capital, credit and liquidity concerns that every corporate has had through the crisis to their advantage. Many have been able to drive through an agenda of better cash flow forecasting deep across the enterprise, assisted by their increasingly cross-functional approach.

One area that has clearly improved in recent years is standardisation, in terms of how treasurers deal with their banks. “We are seeing some real traction in the whole ISO 20022 XML space now that is finally there. That is partly being able to manage bank counterparties, to unplug a bank at will, but you are also seeing greater integration of forecasting capabilities in the ERP,” says Citi’s Mehta.

There is a lot of work going on in this space, as best in class cash flow forecasting requires other symbiotic partnerships between banks and corporates, not least the sharing of critical information. “Banks have part of the input into that and lots of it sits within the ERP of the company. This is especially the case for corporates that are largely centralised,” adds Mehta.

An internal alignment of information and processes is vital for an efficient enterprise-wide cash flow forecasting operation. But how can the treasurer ensure this alignment happens? Frans Cleton, Managing Consultant at ConQuaestor Consulting, suggests the following three points when working across the business in this way:

  • Information and process integration/alignment. Organisations should start to work with one set of data to manage their business and should align their processes (business planning, cash flow forecasting, sales and operational planning, etc). Ideally the company should work with a single business model from which the cash flow forecasting and the optimal funding strategy can be derived.

  • Set clear responsibilities within the organisation (governance structure) for the different functions (per key process). Treasurers should be responsible for cash optimisation and funding, for example. Business managers should be responsible for optimising the return on working capital.

  • Managers should co-operate with each other even more. As treasurers become more involved in the sales and operational planning process, they need to establish a working, mutually beneficial relationship with their peers in the company.

The future of cash and trade

Taking this all into account, just how far will cash and trade converge in banks as they seek to offer products and solutions that meet corporate needs? According to Bank of America Merrill Lynch’s Knott, we are unlikely to see 100% convergence in the short term. “This is for the simple reason that banks should align their approach to corporates based on how the corporate is organised, and while this approach may be fit for purpose for some corporates, others will continue to segment these functions within their organisation,” says Knott.

Banks will still need product sales specialists for highly complicated cash solutions, and for trade finance transactions. When a bank is working with large, potentially complicated clients, it is not possible for one relationship manager or sales person to cover the whole breadth of products within that space – there are very few people who can, and this wouldn’t bring the added-value to that specific segment.

To address this issue, a number of banks have established unified trade and cash solutions teams. This central function allows the bank to devise more solutions across the different products, providing support to the sales teams while being supported by the product management teams. A team such as this would also have scope to look at bringing in elements such as foreign exchange (FX) components or commodities, for example. This in turncan add extra value for the corporate.

For corporates, the risk driver of the convergence is unfortunately not going to go away, with the rise of new trade corridors and the economic situation in both Europe and the US. This means that the working capital imperative will stay as strong. Core skills that treasurers are used to using in the cash space will need to be applied to the trade space, with outsourcing and centralisation being two examples.


The convergence of cash and trade is a trend that makes sense from both a bank and corporate perspective. As treasury works more closely with departments such as procurement and sales in order to gain an even more complete handle on the organisation’s working capital, it needs collaborative solutions that fit this new scenario. And for the banks it has made sense to bring cash and trade close together, as they do overlap in many ways.

With cash and trade convergence achieved at a basic level by a number of the banks, we are starting to see more sophistication being added to the solution mix as banks seek to add value. One example of this can be seen in the FX space. Some banks have begun to layer a number of FX components on top of their cash and trade offerings, prompted by the fact that cross-border trade triggers FX transactions. This is just one example of the innovation that is being seen, and will likely continue to be seen as a number of drivers on both the corporate and bank side continue to push the convergence of cash and trade.