Cash application and reconciliation is a widely discussed and debated topic amongst corporate treasurers. Mahesh Kini, Asia Pacific Head of Cash Management for Corporates Global Transaction Banking at Deutsche Bank, looks at the challenges facing corporates in Asia and how the Bank can help its clients expand across the region.
Mahesh Kini
Asia Pacific Head of Cash Management for Corporates Global Transaction Banking
What are the main challenges that treasurers face when trying to gain more control/insight into their company’s order-to-cash (O2C) cycle?
Managing an efficient O2C cycle is of utmost importance to corporates today. However, there are two key challenges to gaining better insight into the O2C cycle: disorderly data and controls; and the lack of an effective reconciliation process.
With regards to the former, the key issue clients are facing is how to manage in-house data. This is due, for example, to errors in vendor data and material difficulties in managing credit limits, complex products or discounts.
Typically, a corporate may start out with efficient and effective master vendor data and vendor sales data, but over time – due to multiple edits and limited controls on the modifications, as well as a lack of regular updates – the data tends to become flawed. As a result, the corporate has problems with creating the correct orders and managing the process.
The compounding factor affecting O2C cycles is the inability of most corporates to effectively reconcile transactions. This is caused by the lack of an effective way to automate the posting of transactions and closing out the cycles. Many corporates still use manual processes and work flows to identify payments and can mistakenly close out open items on their books due to errors in the reconciliation process.
What are the main cash application challenges facing corporates in Asia today?
A fully-automated cash application is still not a complete reality, because there are gaps in the payment ecosystem. Even in this day and age, best-in-class cash application processes only achieve approximately 70%-80% automation, leaving a considerable portion of payments still requiring manual intervention to confirm a match. This is a result of incomplete payment data, which is caused either by a lack of discipline from payers to include the necessary details or due to different channels used by payers to communicate what they are paying for. Both issues curtail the amount of information that can be transmitted in a payment, thereby limiting the level of automation possible.
“Even in this day and age, best-in-class cash application processes only achieve approximately 70%-80% automation.”
In Asia, the extensive use of paper instruments and vouchers adds further complexity. The challenge is compounded by the need to factor in discounts, bank charge deductions and the use of multiple currencies and languages.
What are the main challenges to improving accounts receivable (AR) efficiency?
The basic challenge is the lack of data on who is paying and what is being paid for. Even when the data is available, the decentralised way in which customers communicate this information, for example by phone, e-mail or fax, can create another challenge. Bringing such disparate – yet valuable – information together can be quite a difficult exercise for most corporates.
Another challenge is managing the variation in payment amounts. Effectively recognising a partial, discounted or disputed payment is a substantial challenge, potentially leading to open items being held on the books for a considerable period. Corporates, which have centralised shared service centres also have to deal with the challenge of operating in multiple languages.
What are the drawbacks of a highly manual reconciliation process?
A manual reconciliation process is highly laborious and time-consuming, leading to unnecessarily extended days sales outstanding and slower clearance of credit limits, thus resulting in a slower sales cycle for the company and thereby increased operational cost. As the risk of mistakes is high, the need for extended controls and monitoring also increases. Another drawback of manual reconciliation is that it takes significant effort to keep a team motivated to consistently perform this repetitive task. In a shared service environment, manual processes lead to increased cost, hence diluting the gains or benefits envisaged from such a centralised set up.
How can banks help their corporate clients with this process?
Deutsche Bank, for example, has attempted to assist its corporate clients in improving the level of automation and accuracy of the cash application process in a number of ways. The solutions can be grouped into two main categories:
- Customer identification.
- Cash application.
In the first category, banks can offer solutions that clearly identify the payer (for example, Deutsche Bank’s Payer ID) or more sophisticated solutions − such as Accounts Receivable Manager − which was launched by Deutsche Bank in April 2013 and is currently being used by a number of customers, including some large business-to-consumer (B2C) customers who effectively manage payments from thousands of retail customers.
In the second category, Deutsche Bank has developed a sophisticated matching engine solution that is able to draw information from multiple sources into a single consistent file format, and then uses an algorithm to match outstanding invoices with the information received by the bank. In this way, we are able to automate, to a large extent, the cash application process by delivering to our clients a matched/unmatched report of their invoices. In addition, we have been able to cater to paper-based collections through the use of sophisticated lockbox solutions.
Deutsche Bank also provides customers with an electronic platform for their payers to conveniently log-in and declare the invoices they are paying for, as well as match payments to the data coming from the payers. These components come together to form a streamlined Management Information Solution (MIS) for clients, including the ability to manage discounts and disputes as well as partial payments.
As corporates expand into new markets, how can banks support them?
Venturing into the realms of a new market is a very important and strategic decision for any organisation. With a direct presence for many decades in all the key Asian markets and a rich client experience in each one, banks like Deutsche Bank have the expertise, local knowledge and know-how on both the banking and corporate side to help customers in their expansion. Providing support for corporates that plan to venture further afield starts with giving them the correct and timely guidance and insights into the new market. This includes sharing our insights and connecting them with our existing customers – as well as regulators – to help them with the process.
Deutsche Bank is able to assist its clients with a quick and easy enablement of accounts and banking services in the new market. Through globally-consistent operating procedures, the bank is also able to translate the corporate’s global policies and procedures into the new environment. Thereafter, Deutsche Bank continues to support its clients in the new market by providing the necessary market research and regulatory updates on an ongoing basis. At the same time, the Bank takes a consultative approach to understanding clients and their situation by recommending the best solutions most suited to their needs across our wide range of banking solutions.
What does partnering with local banks in Asia really mean? What is the key to success?
Partnering is an often misunderstood term in the context of how global and local banks co-operate with each other, and is very loosely defined in the context of Asia. A true partnership between a global and local bank should mean a mutually beneficial, sustainable and integrated solution that helps meet a client’s need with minimal incremental effort and no additional counterparty exposures.
There are three key aspects that make a partnership with a local bank successful:
- Partners should not be direct competitors.
- Both partners should benefit from the solution.
- There should be a significant barrier to entry for each partner to offer the solution independently.
Deutsche Bank, for example, actively leverages partner banks in Asia to enhance its service proposition. Its business model in Asia complements the strategy of local banks in the region. This is key to providing potential partners with the comfort that it is not a direct competitor for their business.
As a leading clearer of global currencies including euro, US dollar and sterling, Deutsche Bank often has a client relationship already established with local banks, which helps to build a trusted relationship. In addition, the volumes generated through providing transactional services – particularly on collections – gives the local banks access to a new revenue stream, and effectively forges a relationship with its customer’s customer as well.
As such, Deutsche Bank strives to achieve the best of both worlds: enjoying tremendous support and co-operation from local banks, while creating solutions that allow its customers to benefit from locally-specific services or enhanced collection reach, without the need to open accounts or deal directly with a local bank (where regulations allow).
Are Asian corporates looking for greater standardisation in their relationships with their banks?
Standardisation is an increasing trend among Asian corporates. To illustrate, Deutsche Bank has been receiving a growing number of request for proposals (RFPs) from Asian corporates, which are turning to international banks to provide streamlined solutions across multiple markets, or use bank-agnostic solutions such as SWIFT connectivity and standardised formats – like XML version 3 and MT series messages for payments and reporting – to communicate with multiple banks through the same file.
Asian corporates, in this case, seem to be following the lead set in Europe, where the Single Euro Payments Area (SEPA) migration has led corporates to review their banking relationships and streamline their operating models by adopting a single SEPA bank. Besides the obvious advantages of SEPA and cheaper transaction costs, the streamlining of banking relationships has also led to ample advantages for corporates through the standardisation of reporting and banking platforms, as well as cash application processes.
How will this help Asian corporates looking to expand, whether in-region or internationally?
The move towards standardisation in formats, communication and documentation makes it easier and faster for corporates to set up in a new market, which helps to execute their business expansion plans. Deutsche Bank promotes standardisation through the use of a single legal framework, as well as terms and conditions, for its transaction banking services across the markets in which it operates.
What challenges remain?
While there are fewer challenges than before, some still remain. Clearing system infrastructures and bank account architecture, as well as regulatory frameworks for banking in various markets, are still not unified. If, for example, a client moves to Thailand, they need to cater to the local withholding tax certificate requirements. In China or Japan, they have to use local languages for both payments and cash application. The continued prevalence of paper-based collections through cheques and promissory notes in certain countries also remains a challenge. But over time, the complexities have been steadily diminishing and, hopefully, will continue to lessen.
How is Deutsche Bank helping to facilitate adoption of XML?
Deutsche Bank has been an early and active participant in, and contributor to, the Common Global Implementation (CGI) initiative. The Bank has also been a promoter of the XML ISO 20022 format, which it considers to be the best solution currently available for a globally-consistent payment and reporting format. As a result, it has been spearheading harmonisation efforts in co-ordination with other banks on behalf of its clients, in order to achieve a commonly accepted XML file format for deployment. Deutsche Bank is fully ready with XML version 3 across the markets and has been supporting its clients in the implementation of the format to achieve better standardisation.
There are still some differences that exist between the banks on the definition of certain formats − mainly due to the country-specific nature of some services and value-added solutions − but Deutsche Bank is committed to continuing to engage in these discussions around the CGI.
