European Cash Management 2015

ECM trends: useful checklists

Published: Sep 2015

In any industry, corporate treasurers are finding that their schedules are increasingly stretched. With this in mind, Treasury Today has produced some useful checklists relating to some of the key ECM topics raised in this Handbook. These are by no means comprehensive, but we hope they provide a useful starting point.

Tips on setting up an SSC

The location: have you considered?

Although variation in roles exists, shared service centres (SSCs) tend to be responsible for one or more of the following: core treasury activity (may operate as an outsourced treasury function); tax, accounting and finance activity (can incorporate a range of other financial activities – sometimes referred to as a financial shared service centre or FSSC); and general corporate activity (human resources, marketing, customer services and IT management are all also ideal activities for a SSC).

The decision on where to locate the company’s SSC should consider all of the centre’s responsibilities and there are also some external requirements which the location should fulfil. The following points outline some criteria:

  • Access to good banking facilities.
  • Availability of professional expertise and trained personnel.
  • Whether there are favourable regulations and a stable political system.
  • The accessibility of major stock exchanges.
  • Whether there is a liberalised capital market.
  • The stability of communication networks. The level of innovation and technology advances could be of interest too.

In addition, there are certain tax considerations to take into account when choosing a location. For instance, have you researched the following?

  • Taxes applied to profits of the SSC and its capital.
  • Thin capitalisation rules – with regards to profit, capital gains tax and withholding tax.
  • Withholding tax rate on interest, dividends and royalties.
  • Double tax treaty network.
  • Controlled foreign companies (CFC) rules – depending on the head office’s location.
  • Stamp taxes. These are usually triggered by the establishment of a subsidiary.
  • Value-added tax (VAT). According to the laws of most countries, VAT is not due on certain financial transactions. The activities of a SSC are usually only in part subject to VAT.

Other areas of attention

Although costs of establishing, staffing and running the SSC should be covered by tangible savings elsewhere, reducing the duplication of efforts across the organisation will result in lower operating costs for the company as well as centralisation, making it possible to exercise greater control over cash flow. Other benefits of economies of scale will be felt – including potential enhanced returns if, for example, the SSC is responsible for investing surplus cash.

SSCs have been growing in popularity and, as more functions have been included in the centres’ typical remit, they are increasingly seen as value adding rather than just cost saving. Suitably, companies have been investing in a more holistic approach – talents, and opportunities to exploit it, are also an important consideration when choosing ideal SSC locations.

Compatibility with a structure that offers standardised global operations, however, should be judged on an individual case basis. Treasurers must ask themselves whether their company’s operations could practically (and beneficially) work with a centralised or partially centralised arrangement. Although ongoing economic challenges encourage the pursuit of cost and process efficiencies, when optimising and streamlining treasury performance structures should be custom-fit.

Cash management in CEE: need to know

The differences between countries in Central and Eastern Europe (CEE) in terms of economies, politics regulations and customs can be vast. “Even cultures exhibit more diversity than is found in Western Europe. For a corporate to do business in CEE, it means adhering to many different systems in this respect,” says Jeroen de Haan, Regional Sales Manager, C&EE, ING Commercial Banking, Transaction Services.

Countries comprising CEE

Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Slovakia, Slovenia, and the three Baltic States: Estonia, Latvia and Lithuania.

Access to finance

This diversity extends into the financial sector in the region with many local and a number of international banks. But this doesn’t mean cash management in CEE is necessarily more difficult for corporates. “Some international banks offer pan-CEE solutions (and, in some cases, pan-European solutions) in order to make financial operations more standardised, and to offer a ‘one-stop shop’ for centrally organised treasuries,” says de Haan. “Access to funding is the cornerstone of development for any corporate business and banks in the CEE region offer a range of forms of financing to support development projects, as well as ongoing corporate business activities. These take the form of: credits in current accounts, working capital loans, advance loans for trade finance purposes, investment loans and commercial real estate.”

What corporate treasurers operating with cash management obligations in CEE do need to know, according to de Haan, is that choosing the form of financing implicates two consequences for the enterprise: “Change of the cost of capital and change in the level of risk.” Therefore, acquisition involves the following:

  • Determination of the level of financing needed.

    It may be connected with a need for a client to contribute with equity capital in financing.

  • Following legal constraints.

    Financing of projects perceived as unacceptable due to legal concerns will be refused by banks.

  • Assessment of collateral.

    The ratio of collateral value to credit value depends on the transaction risk as well as that determined by the banks – due to their own methodologies of assessment of the required value of collateral.

Regional cash management trends

In terms of the cash management techniques used by corporates in the region, the standard techniques – for instance, zero or target balancing and a form of notional pooling called interest compensation – are, in general, supported. “In some countries, there are restrictions in terms of participation of non-residents or multiple legal entities. As a rule of thumb, the farther east you go, the more restrictive the cash management techniques are,” explains de Haan.

Poland provides a positive example, says de Haan, where the banking sector is very competitive and technologically advanced. In this CEE country, corporates can benefit from solutions including: virtual accounts, liquidity management tools (physical, domestic and cross-border pooling) and one point of access to all accounts held at various banks and various countries. “In Poland, recent IT developments are quickly developed into new products and functionalities. Corporate clients can access their accounts via mobile applications or even using an Apple watch, for instance.

“The key players in the Polish market focus on innovation and relationships based on consultation, where solutions developed are truly tailor-made. One of our corporate clients, for example, has online cash-deposit machines located at their premises.” Across the rest of the region’s countries, there certainly is a trend to concentrate cash with the corporate’s treasury centre. Cross border zero (or target) balancing is allowed from many CEE countries. However, as de Haan advises, there are restrictions in some cases. “For a number of countries, it is advised to sweep to an offshore account belonging to the same legal entity.” It is possible to sweep, next to major global currencies, almost all local currencies including the Russian rouble and Turkish lira.

“The main cash management priorities for our corporate clients in the region are centralised liquidity management, further automation and optimisation of costs and increasing security of payments and information workflow, both with regards to internal and external risks,” says de Haan. “In order to achieve these objectives, we are increasingly seeing corporates look for solutions such as host-to-host connectivity which secures and automates information exchange between their ERP system and the banking system. Other products of interest include e-invoices distributed via local clearing houses and presented in the e-banking system.”

Moreover, payment systems in the region are generally quite advanced, but countries do exhibit some variation in terms of clearing for standard domestic payments. “For instance, Ukraine has real-time clearing. Russia, Hungary and Poland have same day clearing, whilst the Czech Republic offers next day clearing.”

A closer look: Poland

Depending on the specific remit of a corporate, many areas will need to be researched thoroughly when considering expansion of cash management structures in CEE. Corporates should seek advice from a wide range of sources to bring themselves up-to-date with local practices and any regulatory changes. In this instance, we go through some of the most significant payment methods in Poland.

Poland, Monika Dabrowska, Head of TS Sales ING Poland explains, has been PSD compliant since 2011. In addition to the ELIXIR system processing low-value payments on a net basis three times a day, some banks – including ING – offer immediate payments using Express ELIXIR. “Both the volume as well as the value of Express ELIXIR transactions is growing, but the vast majority of low-value payments are processed via the ELIXIR system,” explains Dabrowska. High-value payments are processed via SORBNET in real-time on a gross basis.

“The IBAN standard has been obligatory in Poland since 2004. Since which time, it has been possible for corporates to use virtual accounts for automatic reconciliation of incoming payments,” says Dabrowska. And although Poland is not in the Eurozone, SEPA payments have been available in the country since 2007. ING, for instance, introduced the SEPA Credit Transfer in 2007.

Further cash management developments that need to occur in CEE

Cash management, of course, is an area that requires continuous development to provide corporate clients with value-added solutions. De Haan suggests the following key areas:

  1. Further digitisation of documentation. Electronic signing of agreements, for instance.
  2. E-invoicing. Whilst it is available on the Polish market, e-invoicing is not commonly used; whereas the Turkish government heavily pushes e-invoicing.
  3. Building on the security of host-to-host communication between business partners and banks.
  4. The provision for more e-commerce solutions (including 24/7 real time payments).
  5. Big data to adjust products to clients’ needs.

In-house banks: finding value

The choice to establish a central treasury function which is tasked with providing bank-style current account services to the company’s entities has the obvious, and initial, benefits of: being able to concentrate cash in one (or potentially more) location; consolidation of bank accounts; reduction in banking fees and administration costs; and the avoidance of group balance sheet inconsistencies as all inter-company payments are conducted internally. What’s more, as the nature of business becomes more integrated – both horizontally and vertically – the centralisation of treasury operations is an increasingly valuable proposition and one which recent technological advancements have allowed to gather pace.

Given that the benefits of operating an in-house bank (IHB) are largely unquestioned, and many corporates have or are in the process of renegotiating improved financial conditions, where can the added-value be found?

  • Risk advisory role.

    Non-financial benefits offered by an IHB include greater oversight and transparency of accounts across the group, enabling treasurers to fulfil a risk advisory role for the other parts of the business. Moreover, as counterparty risk becomes more of a headache for corporates, it is beneficial for that risk to be managed centrally.

  • Optimising cash flows.

    Corporates are able to recycle cash within the company more effectively – as well as offer improved global oversight and yield on a risk-return basis.

  • Foreign exchange (FX) benefits.

    All major FX transactions across the business can be managed within the IHB, therefore consolidating the number of transactions as well as giving the treasurer a greater ability to optimise cash flows within currencies.

  • Maintaining bank relationships.

    When just one group across subsidiaries is responsible for the management of banking relationships, they can be enhanced and any duplication of effort is minimised. In fact, core banking partners should be brought into any IHB project early on to provide both the consultancy expertise and banking infrastructure.

  • On-behalf-of structures.

    IHBs facilitate the implementation of payment on-behalf-of and collection on-behalf-of processes, discussed in more detail below and in Section 2.

Suitability of IHBs

IHB structures do not necessarily suit every company. The benefits of IHBs are dependent on the presence of several factors, including:The number of countries (and different currencies) involved with the company’s outgoing payments.

  • FX volume and extent of hedging activities.
  • The number of transactions – internal and external – treasury is responsible for.
  • Total amount of bank fees.
  • Group structure and geographical distribution of operations.
  • How centralised treasury management is, including the IT structure (ERP systems, interfaces and electronic banking systems, for instance).

Mobile security for treasurers

The evolving habits of today’s consumers and corporates mean that expectations for mobile applications to be available anytime and anywhere are increasingly commonplace – but what does this mean for treasurers?

It is first useful to reacquaint ourselves with what is meant by mobile. It is typically thought of in two ways: an extension of electronic online banking channels, providing access on a mobile device on a smartphone or tablet and as a utilisation of mobile financial services, such as the ‘mobile wallet’.

Top tips

Whilst the potential advantages of mobile technology in the treasury department, to initiate payments or check balances on-the-go, for example, are largely undebated, security remains a concern. Treasury Today spoke with Ireti Ogbu, Head of Payments and Receivables EMEA for Citi, to discuss the best ways of addressing lingering security concerns:

  • Be well informed.

    Firstly, it is in the treasurers’ best interest to be proactive regarding security concerns. It is their responsibility to address any misconceptions and to keep up-to-date on the details around mobile technology security. For example, the perception it is inferior isn’t entirely accurate: the same security exists in the mobile and tablet world as does when using desktop computers. Information is carried using the same bandwidth and, with the exception that a mobile device does not have a fixed IP address, security measures are applied in largely the same way. “The other point is that there should be no data stored on the mobile device, in order to eliminate the risk of information being accessed if the device is stolen or lost,” says Ogbu.

  • Use training tools and services provided by your bank.

    The responsibility does not fall solely with the corporate treasurer; banks are there to help. Citi, for example – in addition to the built-in security controls for mobile applications – believes it is important for banks to train their clients on cyber security and fraud awareness. In fact, “our corporates are asking for this,” says Ogbu. The bank, like many of its peers, runs numerous educational workshops and has created a training toolkit which includes videos and presentations on best practice security procedures.

  • Check your application’s capabilities.

    It is typical nowadays for mobile solution applications to have a level of custom-specifications built in; solutions can be adapted to suit the needs of corporates. But there are some security essentials treasurers need to ensure their application has. The level of entitlement a user has on a desktop, for instance, must be the same on the mobile device. “You need to have the same level of encryption on the mobile as you do if that user was accessing their account from a desktop. How a user’s entitlement has been set up shouldn’t be able to be changed in any way from a mobile device,” explains Ogbu.

  • Company role.

    Outside of the treasury function, companies would do well to have advice on safe technology usage – and, even better, an employee training programme on security. Security is also about heightened levels of staff vigilance. This can be (partially) achieved through training – to ensure employees use websites responsibly and can spot the signs of embedded attachments, for example. If a corporate trains its staff to recognise attempted infiltrations and socially engineered attacks, it means that they are able to mitigate that risk somewhat – and could even help prevent an attack.

  • Monitor your risks.

    Even with the most stringent security processes in place, a treasurer can’t sit back and relax. Ogbu explains: “In terms of the monitoring of transactions, Citi has a platform, an analytics tool, that reviews transactions against their previous transaction history and reports any transactions that are unusual. The tool helps corporate clients detect risky activity.” What’s more, the bank (like other providers) is developing another detection and alert tool which uses algorithms to create proactive analytics. These can highlight whether there is something not quite right before a transaction is executed.

Maximising the SEPA opportunity

In recent years, SEPA has arguably been viewed largely as a compliance project. But with the official migration deadline for Eurozone countries now behind us, it is time for corporate treasurers to look beyond mere compliance to the major efficiency opportunities that SEPA offers.

Indeed, SEPA is proving to be a catalyst for many companies implementing payment factories. Given the number of opportunities that can reportedly be maximised, are you embracing the following?

  • Are you making the most out of lower bank fees on euro bulk payments and direct debits? A result of banks having to charge domestic tariffs rather than their more expensive cross-border payment charges.
  • Have you consolidated your banking relationships? What about the number of bank accounts held in the Eurozone? This too should be able to be reduced.
  • SEPA Direct Debits enable creditors to collect on a pan-European scale in a uniform way. Have you optimised your company’s management of accounts receivable? What about considering e-mandates? A pan-European initiative, called MyBank and run by EBA clearing, supports a global e-mandate scheme and successfully completed its pilot testing phase in 2014 and launched in October 2014. MyBank is being used to make consumer-to-business (C2B) payments as well as for larger value business-to-business (B2B) transactions.
  • SEPA encourages the implementation of payment factories on a regional or global basis. Collection factories are also gaining in popularity, can SEPA act as a springboard for your company’s implementation of streamlined POBO/COBO process?
  • Multi-bank connectivity using SWIFT is becoming increasingly typical within SEPA countries (especially with payment factories). Are you achieving the associated strategic and operational benefits? Have you even found out how accessible and affordable SWIFT now is?
  • Furthermore, is your company using ISO 20022 XML messaging format? There is a major advantage: this open standard is now being adopted by transaction banks to make it easier for their corporates to make bulk payments in other countries outside of the Eurozone. The SEPA ISO 20022 format also includes a dedicated field to include the entity on whose behalf the payment is being made or to who the credit belongs, simplifying the reconciliation process. With a centralised treasury, ISO 20022 could help corporates achieve end-to-end visibility.

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