Perspectives

Bank Interview: Alan Lin & Frank Xing, Citigroup China

Published: Mar 2007

Shared Service Centres (SSCs) have been an area of interest for companies and banks around the globe for many years. Citigroup has been a pioneer in implementing SSCs in China. In the following paragraphs, Frank Xing and Alan Lin from Citigroup share their China experience of recent years, provide practitioner’s market insights, highlight aspects of the current situation and discuss the future of SSCs.

Alan Lin

China Cash Management and Trade Product Head

Alan Lin is the Cash Management and Trade Product Head of Global Transaction Services in China. Based in Shanghai, Alan is responsible for cash product development and implementation. Alan has significant regional experience with Citigroup as Trade Head in Singapore and Regional Head of Receivables Product Management in Hong Kong.

Before joining Citigroup in 1996, Alan was a Financial Institution Relationship Manager for another major US Bank and obtained an M.S. in Finance from Georgia State University.

Frank Xing

Receivables and Delivery Channel Product Head

Frank Xing is a Shanghai native who joined Citigroup in 2001. Frank heads Citigroup Global Transaction Services receivables and delivery channel product lines, armed with years of experience and a Bachelor of Science degree in Communication and Engineering from the Shanghai Industry and Technology University.

With a very sound knowledge of accounting processes, Frank develops, designs and implements e-Banking solutions that interface with most, if not all ERP systems.

How have SSCs developed in China?

Alan Lin:  We have observed both Multinational Companies (MNCs) and large local Chinese companies implementing Shared Service Centres (SSCs). MNCs began to set up SSCs in China by bringing their best practice from outside China. In general, the MNCs that came to China concentrated on domestic sales or used China as a manufacturing hub for exports.

In respect of those MNCs concentrating on the domestic market, we observed that they started operating as single entities with simple structures. At that time, prior to 2000, they needed very basic banking services. After initial success, they wanted to expand their operations. Local government autonomy resulted in encouragement to MNCs to set up entities locally in each province. In this way, the MNCs expanded geographically and ended up with multiple entities. Each of these entities independently performed identical treasury functions, thereby missing the opportunity of achieving synergies with affiliated entities. At this time, these companies’ group headquarters looked towards centralisation for control and transparency of their entities’ financial operations.

These companies carry out centralisation by implementing the two prevailing models:

  1. treasury centres.
  2. SSCs.

While there is consensus that both models are important, when a company evaluates which model to pursue, we have observed that a smaller group of companies are motivated to select the SSC solution by the need to centralise or by their respective company preference. The bigger group would normally choose a cash pooling treasury centre as a first step and then naturally move towards the SSC model as their treasury functions progress towards a more sophisticated state. However, some of the companies in this bigger group first need to agree internally with all stakeholders. I would emphasise that RMB cash pooling is not a difficult solution to implement and is very cost effective. We believe that the SSC and treasury centre models will in time converge because implementing both models is the only way to truly optimise the benefits that these models are capable of generating.

Frank Xing:  The service scope of an SSC is much wider than a treasury centre, which normally focuses on liquidity management. There are also differences in terms of set-up. In China, a treasury centre can rely on a bank’s system to consolidate funds and information, while in an SSC there is also a lot of activity at the client end. The bank’s clients need to have a sophisticated system and solutions in-house for an SSC.

The foremost requirement is that the client requires an Enterprise Resource Plan (ERP) system. The second is that the client needs to have a working relationship with a bank that can provide a total solution, i.e. a bank that has a thorough understanding of SSCs and that is able to provide seamless system integration for the flow of information.

What techniques can companies use to centralise their cash in China?

Alan Lin:  As interest rates in China are regulated – and the spread between the bank lending rate and deposit rates are relatively larger than elsewhere – through centralisation, group companies with multiple entities can benefit from the efficient use of cash from other entities within the group.

Inter-company lending is only permitted through ‘Entrust Loans’, where a bank acts as the agent of the depositor (‘the principal’) and on-lends the principal’s entrusted funds to a borrower designated by the principal. Entrust loans are the basis of a cash pooling arrangement, ie a structure whereby funds are physically swept to/from a number of subsidiaries into a header account. Cash pooling without the physical movement of cash is presently not permitted.

Cash pooling results in savings for the entire group. Citigroup has developed a value added feature to allocate group savings to individual group entities based on a pre-defined mechanism. As the objective is to optimise the spread for the group on an overall basis, we have observed that this has had an impact in reducing internal resistance to the implementation of a centralisation model.

Foreign currency in China is regulated. Companies are required to open different foreign currency accounts for different purposes – such as capital, loan and settlement accounts, among others. Therefore, each group entity may end up with multiple accounts.

The government recently extended the cash pooling regulations to permit foreign currency cash pooling. On meeting certain regulatory requirements, a group may apply to conduct foreign currency cash pooling. There are two key benefits to foreign currency cash pooling. Firstly, it is possible to self-fund, which is the same as under RMB cash pooling. The second benefit arises from savings generated by offsetting internal buy and sell needs amongst group entities. Foreign currency cash pooling creates value by avoiding the additional costs of external transactions.

What services are offered by a typical SSC in addition to cash pooling?

Frank Xing:

Payment Solutions

Payment solutions are the most basic and broadly used service in an SSC. Normally, invoices are processed by the relevant group entity using the group’s ERP system and subsequently processed by the SSC. The alternative is for everything to be done in the SSC. Either way, once the payment file is produced, the file needs to be sent to the service provider for payment. There are then two options for data exchange:

  1. Manual uploading of the file to the bank’s e-banking portal.

    After invoices are processed, payment instructions are consolidated and sent to the bank on a weekly (or other schedule) basis, using a payment instruction file uploaded through Citigroup’s e-banking portal. Based on our SSC client statistics, 80% of clients use file up and download.

  2. End-to-end automation.

    The other 20% will directly push the file to the bank from their ERP system and the bank processes the file automatically. There is no manual intervention in this process and it improves the workflow.

The next important step is reconciliation. There are two ways for a client to reconcile their Accounts Payable (A/P) records after transferring the payments from the ERP system to the banking system. One is that just after their ERP system issues the payment to the bank, they close the A/P record. Around 45% of clients opt for this method. The remaining clients hold the A/P book status open until the bank sends confirmation and advises that payment has been released and the account debited.

Citigroup offers an added value service that provides an e-mail to beneficiaries, notifying them that payment has been processed. Approximately 70% of clients subscribe to the beneficiary e-mail advice service.

Collection Solution

In a basic receivable solution, the payment information received from the payer is routed through the bank interface to the SSC’s ERP system and then to the sub-entity’s account. Roughly 25% of SSC clients use this collection service. In the basic solution, the payer name is used for the reconciliation of payee details with the receivable records. It can be difficult to match the payer name and receivable records due to the different possible ways of interpreting a single Chinese expression.

In order to avoid any problems in reconciliation, Citigroup offers an enhanced receivable solution through Virtual Accounts for payer level auto reconciliation. In this solution, the payer can make a payment to the SSC via a Virtual Account that is a combination of the SSC’s regular bank account number and payer reference codes. The benefit is that once the payer has deposited the payment and the bank receives the payment after clearing, the bank extracts the reference code for consolidation in its report and sends this to the SSC for automatic Accounts Receivable (A/R) record reconciliation. Near 40% of those subscribing to the collection service are using Virtual Accounts (payer code).

A relatively new service that Citigroup has been offering is A/R reconciliation against invoices. This service is for clients who want to track payments against their invoices. This solution is already in place for some clients on a customised basis. Customisations of this kind enable SSCs to expand their scope from a traditional payment service provider to receivables and supply chain management.

Liquidity Management

The liquidity management service is a function of the treasury centre. Out of nearly 100 liquidity structures that Citigroup has set up, over 30% have centralised payment functions, which is the core functionality of an SSC.

A new feature for cash pooling is tax efficient sweeping. When funds are swept in a cash pooling structure, for every movement of funds, according to Chinese regulations, the borrowing entity is required to pay withholding tax on the interest due.

Citigroup has developed a solution to avoid unnecessary fund movements. Compared to a zero balance cash pooling structure, which will often sweep more funds than needed, tax efficient sweeping allows companies to sweep only as much as needed. Currently 20% of cash pooling clients are using this method.

What solutions does Citigroup offer to companies working with more than one bank?

Frank Xing:  As China is a very large country, there is no single bank that can meet all the requirements of a single major client, so the subsidiaries within a group may have banking relationships with several banks. Citigroup offers a multi-banking service to its clients by which the back-end systems of all partner banks are connected. The benefit to the SSC is that it is able to transact from accounts with other banks through Citigroup’s e-banking interface. As solution requirements grow more complicated, a multi-banking services solution has become more important than ever before. The service has been available for three years and has grown with the increase in SSCs.

Through the multi-banking platform, cross–bank sweeping is also possible.

How receptive are Chinese companies towards SSCs?

Alan Lin:  MNCs began to set up SSCs by importing their best practices to China. Local Chinese companies also began to set up SSCs. While both MNCs and Chinese companies share some common objectives when setting up an SSC, there are key differences in the reason for setting up an SSC. MNCs want to provide services to subsidiaries within China or overseas and are driven by factors such as cost, potential savings, human resources and services. Chinese companies mainly use SSCs to serve overseas subsidiaries as they invest funds and have retail activities overseas. Through SSCs, they can see what happens there and consolidate funds at HQ level. This brings the benefit of a more standard process and more security. Currently among SSC clients, 90% are MNCs and 10% are local companies.

Frank Xing:  On an overall basis, the SSCs established by companies are divided into three categories – serving locally, regionally and globally. The percentages of this division are 45%, 40% and 15% respectively.

What have been the major challenges in promoting the SSC business in China?

Alan Lin:  The major challenges we have experienced so far have been dealing with a group’s internal resistance to implementing an SSC and the diversity of requirements of different entities. Citigroup has different parameters for each client and using a variety of solution components, in practical terms, we implement a separate customised solution for each client. We help meet the diverse needs of entities, by helping our clients to integrate their ERP systems with our interface.

The key is to have good project management discipline and a dedicated implementation team. Knowing and managing the details has been the key for success factor for Citigroup in this regard.

How does Citigroup assist the potential client at different stages in the evaluation, decision–making and implementation of an SSC?

Alan Lin:  Citigroup offers assistance to the client at all stages of setting up an SSC, from conception to implementation. The scope of service varies from client to client, depending on the client’s familiarity with the concepts and experience in making group–wide decisions. The decision to opt for an SSC in the case of most of the MNCs is done at headquarters outside China, as part of the company’s global initiative. As a result, Citigroup tends to be an execution only partner in these cases. On the whole, local entities of MNCs have not carried out much background study and basic evaluations. However, they do have knowledge of the concept, mainly learnt through experiences at other locations. Normally, the clients issue a Request for Proposal (RFP) to initiate the formal process and then, by mutual discussion, the scope of work at each end is decided. For local companies, the bank actually has a consultant role throughout the process and it is a lot more than a service provider.

Are there any new regulatory developments on the horizon of which treasurers should be aware?

Alan Lin:  The Chinese Government is following a consistent policy of deregulation and has made significant progress towards liberalising the financial and banking sector in the last few years. In particular, the Pudong Nine Measures in December 2005, FX Reform in April 2006 and a series of other liberalising measures in 2006 have all allowed qualifying companies to facilitate foreign currency treasury management, including permission to undertake foreign currency cash pooling.

Looking at the China market more generally, how are treasurers’ requirements currently evolving?

Alan Lin:  Clients are getting bigger and more sophisticated – the result is that their service requirements are getting more complicated. At the same time, globalisation has made it much easier for companies to have a presence throughout the world. All of this is supported by the practice of using a single (or a very small number of) SSCs. Correspondingly, treasurers need to have quicker and more comprehensive access to information from all over the world.

Frank Xing:  Citigroup received requests from clients to develop a solution enabling them to view liquidity positions throughout the world, regardless of where or in which bank those balances reside. Citigroup has developed the technological lead to obtain data from every group entity bank account and aggregate this information in a centralised database. The system provides a global view of the information, but also allows treasurers to perform a wide range of analytical functions.

The latest trend in China is to outsource SSC functions. We have seen that the number of companies providing outsourcing services is growing. Citigroup has been working together with our clients and their outsourcing service providers to create further efficiencies and savings wherever the opportunity exists.

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