Treasury Today Country Profiles in association with Citi

in association with

RBS

Key trends in cash and trade

Anand Pande and Steve Everett, RBS

Interesting times lay ahead for the transaction services industry and providers have to deliver on many fronts. Without doubt, the quality of the relationship and the insight provided by banks around the converging themes of cash and trade continue to offer a vital lifeline for corporates the world over. Anand Pande, Global Head of Trade, and Steve Everett, Global Head of Cash Management, discuss the depth and breadth of transaction services capabilities at RBS.

Anand Pande

Global Head of Trade

As the Global Head of Trade, Anand Pande is responsible for driving the development and growth of RBS’s trade finance business globally. This covers all products from traditional trade services and finance to commodity and supply chain financing solutions across more than 35 countries. Pande was recently honoured by the Asset Asian Awards 2013 as the Trade Finance Banker of the Year.

Steve Everett

Global Head of Cash Management

As the Global Head of Cash Management, Steve Everett is responsible for developing and promoting RBS’s market-leading, innovative cash management solutions with product specialists across the world. Previously he was Global Head of I-LIM and FX, responsible for delivering the overall Liquidity and FX proposition for the transaction bank.

Regulatory changes and a low-yield environment are just two of the major factors that continue to affect transaction banking in both the cash and trade functions.

From a cash perspective, Steve Everett, RBS’s Global Head of Cash Management, notes that many corporates are long on liquidity and must find ways to safely look after their cash – a topic which has been at the forefront of the agenda throughout the financial crisis – and manage counterparty risk and exposure to financial institutions. He states that “in almost all markets, interest rates have decreased over the last five years – none more so than in euro, dollar and sterling, which are the principal currencies in which our clients hold liquidity.”

This has left many corporates severely challenged in terms of looking for yield but, notes Everett, “few treasurers will trade safety for yield. This is where the large global transaction banks, such as RBS, can help.” With a well-developed product suite, RBS enables treasurers to have access to liquidity as and when they need it in the event of counterparty challenges, whilst benefitting from an improved yield, when they don’t.

Regulation

Globally, banks are continuing to face increased regulatory pressure. “We’re seeing new regulation from the US, Europe and the UK, as well as from some of the Asian markets,” says Everett. This regulatory influx, he observes, is shaping how banks work with their corporate clients, particularly in terms of helping them to understand precisely what that regulation means to them.

On the global stage, the impact of regulation on banks is clear, but there is a knock-on effect for clients. With Basel III, for example, the liquidity constraints that regulators are placing onto banks may change the dynamic of the deposits a bank can afford to take. “There are some unintended consequences,” admits Everett.

The Single European Payments Area (SEPA) is also front of mind. “We have a large client base that is either based in Europe or doing business in Europe. They all need to ensure that by 1st February 2014 they are compliant with the regulation,” adds Everett. This is clearly absorbing a lot of corporate time and effort.

Local knowledge

As many corporates operate in the global arena, they are increasingly looking for banking partners with not only a global perspective, but also local and regional knowledge. Everett observes that, certainly on the cash and liquidity side, many businesses have stepped away from one global partner that does everything. Now, Everett notes, many seek regional expertise and are prepared to use several banks to get it.

“And this is where the strength of RBS can benefit clients; our presence in 37 countries is critical. You cannot get that local knowledge without having people on the ground who understand what is happening in a particular country or hub, whether in South-East Asia, Central and Eastern Europe or the Middle East. Maintaining that local presence is something we are committed to.”

Cash support and SEPA

Is the pressure on the modern treasurer too much to bear? “I think they’ve come through all of the uncertainty of the financial crisis in terms of understanding their cash position,” asserts Everett. However, he warns that treasurers should never lose sight of this and “one should never get too comfortable; the last thing you want is to get into new trapped cash scenarios, as market dynamics change.”

Indeed, Everett believes that “visibility of cash remains king.” Corporates are generally sitting on a lot of liquidity, but they need to know where it is, so that they can direct it to safe havens, if needs be. “And that’s where our liquidity management solutions come in to play and why we have extended our pooling, sweeping and investment products into Asia over the last 12 to 18 months,” he explains. Unless they have specific trapped cash issues, RBS’s corporate clients based in the US, Asia or Europe can “pretty much manage to get cash into the right location on a daily basis and that, first and foremost, ensures its preservation.”

RBS SEPA Accelerator

However, one potential source of concern is the number of corporates still struggling to meet the SEPA deadline. RBS, as a major mover of euros, has developed a solution – the award-winning1 SEPA Accelerator. With SEPA Credit Transfers (SCTs), the payment must be formatted using the ISO 200022 XML format. “A number of corporates still need to change the way that their payment instructions leave their ERP systems, to enable them to get into the clearing systems,” notes Everett. “Success is all about knowing detail such as the Bank Identifier Code (BIC) and International Bank Account Number (IBAN) of the ultimate beneficiary; for a large corporate this can be a huge undertaking but this new solution can do the work for them.”

For SEPA Direct Debits (SDDs), there is a change in the way that mandates are managed and the type of information that the client needs to hold. SEPA Accelerator offers an enrichment service of the legacy mandate and mandate management that ensures everything is compliant, so clients can continue to collect funds in the usual way. This gives them certainty around their cash management and cash flow forecasting. “It’s very much a backstop solution for clients that are not ready to be fully SEPA compliant.”

Through the creation of a new SEPA microsite, RBS has been able to share insight with corporates, that helps them to understand the implications of SEPA, what they need to do and importantly, says Everett, “what RBS can do on their behalf or in partnership with them.”

GlobalXChange™

GlobalXChange™ is an RBS umbrella brand for a number of products that feature a foreign exchange (FX) conversion path. It enables clients to have greater transparency around FX rates that are being applied to their transactions, whilst improving operational efficiency. “Five years ago, the key focus was on managing cash across multiple accounts and how to bring those balances together to leverage that liquidity,” states Everett. “Today, corporates don’t want to have multiple accounts spread across a wide network, because it’s operationally inefficient and results in numerous auditing and accounting challenges.”

Increasingly, he sees treasurers using one account to make multiple payments in multiple currencies. RBS can extend the reach of the high and low value payments that they can make, in up to 140 currencies for corporates and FIs – via one account, in the client’s base currency. Clients can send RBS a batch of payments and the bank will translate them, manage the FX risk and send them out through a single account, without the client having to open up a currency account in each location where it wants to pay a beneficiary.

“I think everyone is trying to keep their heads above water,” comments Anand Pande, RBS’s Global Head of Trade. For Pande, the current environment presents quite a different world, where a bank has to look at conflicting objectives, while ensuring it continues to be relevant to its clients. The ideal paradigm is one where businesses can simultaneously increase revenues, reduce costs and optimise capital. But delivering this in a world which is slowing down is a tall order. Indeed, recent global trade figures indicate growth of just 2%, whereas two years ago it was more like 10%. “Clearly there is a big slowdown,” states Pande. The emerging market sector was supposed to be the saviour but even this has been unsettled, as we have seen with recent events. And on top of this, there is the risk to the financial health of overleveraged organisations in an environment where growth is slowing down and margins are compressed. Hence, the profitability of these organisations is under increasing pressure.”

Pande believes that RBS’s dominance in supply chain financing (SCF) “is a key strength” for clients seeking this paradigm. Whilst SCF has “still not reached maturity level”, it is developing in the right direction: RBS’s own SCF book has grown by 42% in recent years. “The traditional attraction,” he says, “is access to cheaper funding options for suppliers, backed by the stronger credit standing of the buyer.” Depending upon the liquidity options required by the buyers, they can also consider extended payment terms from their banks, while ensuring timely payments are made to their suppliers. But the concept is evolving and newer models are being considered where, for example, the discount level is based on the timing of the payment, and also on the alignment of electronic invoicing (e-invoicing) with SCF, helping to streamline the process.

Part of the solution lies in giving customers a choice in terms of how they transact with the bank. Presented with the option of proprietary bank software, SWIFT or third-party systems, clients can choose the most optimal solution for them to gain increased back office efficiencies. Says Pande, “RBS is one of a small number of banks which has an open highway, in terms of connectivity.”

The trade function is no stranger to regulation either. States Pande, “This is where we can play a key advisory role, because everyone is now searching for growth from new markets.

New trade corridors means ensuring growth occurs with adequate advice on risk mitigation tools, as well as with proper regulatory conformance. This is an area where leveraging the scale of the RBS network can be extremely beneficial to our customers.”

Trade concerns

“One of the main issues for treasurers on the trade side is how to achieve an optimum balance between growth, liquidity and leverage,” says Pande. In achieving this balance, the RBS network plays an important role in helping clients understand local markets. The bank also helps clients with their cross-border growth aspirations, by acting for OECD domiciled corporations as the trade bridge into and out of Asia. “RBS provides a range of tools to help corporate expansion plans, both pre and post acquisition, and works closely with the extended business thereafter, through its local country network”.

RBS draws upon the skill set of its trade asset management and distribution team to help manage risk, so that the bank can give clients more balance sheet and hence become more relevant to them. At the same time, the bank distributes and sells down exposures to investors “who want to have access to high quality trade assets.”

“People often think of trade as simply intermediating cross-border flows, but trade is not only about import/export; it is also about the domestic market. Indeed, more than 50% of the GDP of most significant trade nations is domestic,” Pande says. “Having people on the ground who understand the local market, and can offer solutions to help companies grow and expand their business domestically, becomes an important differentiator.”

The effects of Basel III on trade

“With the current state of play, more capital is now required for the same amount of trade,” notes Pande. “If margins are going south, then clearly trade is going to suffer.” He feels banks have to collectively impress upon the regulators that trade business comprises of short term self liquidating transactions and hence has to receive the right capital treatment. In this respect, some progress has been made.

But banks also have to work with corporates to remove under-used credit lines. Says Pande, “If your credit lines are not utilised there is still a cost in terms of capital; we need to optimise credit lines and get rid of the excess.” The requirements of Basel III will make the world a better place, but it is also vital to achieve the right treatment for trade, otherwise I think the trade finance business is going to be under tremendous stress”.

Forging the BPO

“For some, the Bank Payment Obligation (BPO) is a development that uniquely offers risk mitigation in the otherwise trust-based open accounts space,” explains Pande. “BPO will thus help energise global trade.” RBS, as one of the four banks which helped draft the Uniform Rules for Bank Payment Obligation (URBPO), is committed to the concept. However, Pande believes that BPO has a long way to go before it becomes scalable, as it cannot be a push from the banks, but needs to be a pull from the corporates.

For this to happen, banks will have to invest time in educating corporates – “and then there are practical considerations,” notes Pande. BPO involves the electronic matching of data. Banks should be able to receive data electronically from the corporates and convert it, to enable straight through processing (STP). A plug-and-play format between corporates and banks to send and receive data will help in increasing adoption rates.

Corporates also deal with large and small banks – often across multiple geographies. “There is a need to on board the small banks,” Pande says, “but the cost of implementation for them may not be palatable. I don’t see that happening soon, it’s a medium-term option,” he suggests. “However, if we get these things right, then BPO is going to be a huge success story.”

The rise of RMB

“With the progressive internationalisation of renminbi (RMB) in terms of trade settlement, there are certain areas where the currency is gaining much traction, says Pande. “If you look at Hong Kong and China, the settlement in RMB between these markets is dominant. The RMB at the moment has climbed from being ranked 20th as an international currency at the end of 2011, to 11 in 2013. The growth in RMB settlements has been fast and accounts for 15% of the China trade. These trends are positive and in time, we would expect to see RMB continuing its journey, to become one of the major trade settlement currencies.”

RBS is investing in its product set around this industry development and in terms of the offshore RMB, the bank is now opening up accounts in Western Europe, explains Everett. The bank is looking to include these accounts in cash concentration liquidity pooling solutions and is also working with other industry players to look at how the UK can establish itself as an offshore clearing hub in a similar way to Hong Kong. “As an international bank, we are aiming to be a leader in this field, particularly in Western Europe, as corporates become more aware of the opportunities around RMB.”

Maximising corporate growth potential in Asia

Intra-Asia trade accounts for around 60% of all Asian trade flows for which RBS has local currency products. But as additional new trade corridors open up, including those to Latin America and Africa, it is predicted that eight of the top 20 trade partnerships will be ex-Asia. At an estimated value of around $2 trillion by the end of 2030, this will drive the shift in emphasis from West to East. “With excess liquidity within Asian corporates, we are seeing an increase in acquisitive trends, notably with Chinese, Indian, Thai and Indonesian companies – and banks have to facilitate that,” notes Pande, adding that “companies will face a big problem in the future, if they exclude Asia from today’s planning.”

Cash and trade as one

Intuitively, observes Everett, “trade and cash have to come together at some point because companies need to maximise the use and forecasting of their cash” – and a key focus will be around SCF and FX. To this end, RBS is moving to position both elements as a joined-up proposition. He sees niche opportunities opening up already. In the US for example, by using an Earnings Credit Rate product, if a client is willing to place deposits with RBS, the bank can use the nominal interest that it would pay on that to offset some of the client’s banking fees; often these are trade-related. “That can give the client a good offset between revenue and cost in its financial performance”.

The benefits of bringing trade and cash together across multiple localities is abundantly clear. But, says Everett, “if you are going to do it, and do it well, you need to be on the ground; that’s where the RBS network is leading the way”. Many banks talk about partnering but, he states, “nothing beats actually having a physical presence – in terms of the people, buildings and technology, which underpins the ability to link directly into the local market”.

In the end, for Pande, it boils down to “the real old fashioned approach of thinking about how we can make the life of the customer simpler”. And that, he says, is where RBS excels. “A bank may claim the best technology and the best products, but it is equally important to have that softer people side and the ability to form partnerships.”

  1. The Banker Transaction Services and Technology award for innovation in wholesale payments 2013

RBS

The RBS Group is a large international banking and financial services company serving over 29 million clients across the UK, Europe, Middle East, Africa, Americas and Asia. International Banking, alongside Markets, is part of the wholesale banking business. It’s Transaction Services business ranks amongst the leading international providers of transaction banking services – delivering domestic and international payments, cash and liquidity management services, trade finance solutions and commercial cards to corporates, financial institutions and public sector organisations around the world.

RBS’s solutions range from single onshore clearing accounts, through innovative liquidity and short-term investment solutions to full white-labelling of our cash management and trade finance capabilities. An on-the-ground presence in 37 major trading economies and partner bank agreements worldwide, gives us the global reach and the local expertise to help drive your business forward. This extensive footprint simplifies the clearing process across currencies and geographies and enables you to leverage our proven trade solutions, to manage your trade flow products and trade finance transactions. Access to specialist advisory teams, an award-winning product set and integrated end-to-end solutions gives you the tools you need to enhance your capabilities.

Disclaimer

The foregoing is published for information purposes only and does not constitute (i) an analysis of all potentially material issues, (ii) a representation or warranty as to the accuracy or completeness of the information or (iii) an offer to provide any products or services. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation.

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