Citi experts consider the opportunities and headwinds currently defining the region, and explain how treasurers can navigate them successfully, keeping their clients informed about market developments and supporting them in harnessing cutting-edge technology.

So far, 2019 has proved to be an eventful year for Asia. The last few months have featured elections in India, Thailand and Indonesia, while the ongoing US-China tariff negotiations has started to generate structural changes in capital and trade flows across the region.

For Ernesto Pittaluga, Corporate and Public Sector Sales & Marketing Regional Head – Asia Pacific, Treasury and Trade Solutions, Citi, geopolitical uncertainty is a key issue for firms across the region, as this impacts the enterprise value chain. He notes that trade tensions could lead to the redistribution or relocation of production to facilities based in ASEAN, with implications for companies’ banking structures, cash management needs, and funding requirements in these markets.

Likewise, Pittaluga says that actions such as rebalancing export markets, relocating production facilities, and/or substituting suppliers have implications for treasury cash flows and risks. Shifts in cash flow patterns may necessitate adjustments to cash pool structures and intercompany funding arrangements, entailing a detailed assessment of associated regulations and tax implications.

Regulation

Meanwhile, agility in navigating regulation is another area of focus for firms operating in Asia. A survey of CFOs and treasurers at Citi’s Treasury and Finance Conference in April 2019 established that regulatory and tax framework related changes are the number one theme impacting their finance and treasury key performance indicators (KPIs). APAC treasurers also need to manage a range of government-led initiatives, giving both opportunities and challenges.

“In India, for instance, there has been a continued impetus towards promoting digitisation post the demonetisation initiative in November 2016 including the introduction of government-sponsored interoperable apps like BHIM to promote use of UPI, the launch of BharatQR (a unified QR platform across cards and UPI) and subventions to acquiring banks for low value card and UPI transactions. In the latest budget released on July 5^th 2019, the government has proposed no merchant discount rate (MDR) for companies with more than Rs 50cr (US$7MM) turnover¹ accepting payments through digital means,” Pittaluga notes. “In China, we have had new, progressive, cross-border liquidity management programmes proposed. They are all positive developments – but at the same time, firms do have to contend with very high levels of regulatory complexity.”

Knowledge as an enabler

Pittaluga says it is “very important” for corporates to keep abreast of developments and try to anticipate their impact. “It’s about assessing new risks and opportunities,” he says. “Corporate clients expect support from us in that regard.”

As such, he says the bank proactively communicates key changes to clients and how these are relevant for their businesses. To facilitate client access to regulatory and market developments globally, Citi offers an external portal, the Knowledge Exchange Centre (KXC), that provides a single point of access to market intelligence from the bank’s experts across the globe. “KXC offers insights and analysis across several areas including regulation and geopolitics,” says Pittaluga.

To highlight how the portal works, Pittaluga points to the new cross-border pooling programme in both RMB and foreign currency announced by China’s SAFE in March. “Its analysis would typically be of very high interest for a client,” he says. “We prepared a concise deck that explained to treasurers what’s new with the programme, the differences with any other existing programme, and the opportunities it presents to our clients.”

Brexit provides another example of how Citi’s portal can help treasurers. “Brexit is an area where a corporate could see changes in the way they run their European operations,” says Pittaluga. “It raises questions for firms about cross-border payments in Europe and how they manage liquidity in the region. What part of the provisions of the EU is the UK going to live with going forward? What exceptions are or will be approved for the UK? All of this has very specific repercussions to the way corporates manage their businesses in Europe – and the KXC represents a useful window into updated information on this and many other current subjects.”

He adds: “If you are a treasurer or CFO, how do you manage geopolitical risks or regulatory change? A big part of the answer is by researching what the banks have to say about a particular development, and discovering the opportunities and issues that emerge from it. Citi is well placed to play that advisory role because we are operating in all these markets across the region – we have a very detailed understanding of what’s going on.”

From trade tensions to growth opportunities

Like Pittaluga, Sandip Patil, Asia Pacific Head of Liquidity Management Services and Financial Institutions Group for Citi’s Treasury and Trade Solutions, highlights geopolitics as one of the major causes of uncertainty for corporates across Asia.

“It’s not just about China and the US,” he says. “There is this important spread of change that we see across supply chains in Asia Pacific – from Australia, which has a huge commodity supply exposure, to China, all the way to North Asia, into ASEAN or South Asia and North America. The fallout of this has had an impact on the trade talks between China and the European Union, too. Treasurers will need to consider the impact of these changes on their treasury flows and intercompany arrangements.”

Different regulatory landscape

As for the regulatory challenges and uncertainties for treasurers across Asia, Patil points out that there are more variations across the region than in any other geography. “The regulatory regime is different in each country,” he says. “It’s incredibly fragmented, right from rules governing clearing infrastructure, to banking infrastructure, to what is allowed in terms of foreign exchange and inter-company lending. Regulations across practically every space of concern to treasurers and CFOs are exposed to country to country variation.” Likewise, Patil notes that countries have different tax regimes: some countries charge transactional taxes, some charge border taxes, while income tax levels vary across the region. “That all amounts to a challenge for treasurers,” he says.

If such challenges weren’t enough for APAC treasurers, Patil points to variation in monetary policies. “They are very divergent,” he says. “You can have a situation where one country is taking a very expansive stance, pumping liquidity into markets. Another country, meanwhile, is trying to contract. You see inflation in one country but not in another; liberalising policies in one country while another is trying to increase taxes. From a client treasury perspective, that policy fragmentation creates some of the biggest uncertainties in managing businesses in the region.”

Opportunities for growth

Despite the headwinds, the region also has a positive story – one that makes navigating those hurdles worthwhile for corporates. Firstly, says Patil, due to a combination of factors, the quantum of growth Asia offers outstrips any other region. For one thing, Asia’s population represents approximately 60% of the world total, yet the median age is 30.7 years, compared to over 40 for most European countries². There is also a deeply embedded savings culture, and discretionary spending on luxury goods is rising fast.

Meanwhile, unencumbered by legacy infrastructure, Asia has taken a “technology-leap”, with mobile and new technologies proliferating, especially in big countries. “If you combine all those factors into one bucket, you get a very powerful, very compelling growth story, and that is the dilemma for our clients,” says Patil. “On one hand, you have growth and a very promising outlook to exploit; on the other hand, you have to deal with all the fragmented infrastructure and many sources of uncertainty. Managing the two together is the challenge that every treasurer and CFO deals with here in Asia.”

The rise of digitisation

In today’s 24/7 world, APAC firms are rethinking their business models and digitalising their infrastructure. In the past, investment was directed towards, for instance, ERP and manufacturing systems, but Patil now sees more broad-based digitisation of organisations – this is affecting companies’ client-facing systems and their financial and treasury systems.

“That is now the foundational infrastructure for the new world,” he says. “On top of that, different tech-led systems are being deployed by firms to help them take efficient decisions on liquidity, funding, foreign exchange, counterparty risk management and distribution. Each and every activity our clients have to deal with is now digitising, and that’s creating a powerful platform for them to optimise and manage their businesses efficiently.”

One key area that treasury teams are looking to improve through technology is cash flow forecasting. Having accurate, timely cash forecasts is essential to the management of firm-wide liquidity, funding and risks. “It is probably the biggest headache every treasurer faces, but new technology has the potential to help in ways that were not possible before,” says Patil. “Citi can help clients objectively benchmark their treasury function in terms of where they are at versus their peers. We can also offer practical suggestions in terms of the scope for digitisation and available tools to manage flows, liquidity and working capital efficiently.”

Digital revolution

Morgan McKenney, Head of Core Cash Management for Asia Pacific, Treasury and Trade Solutions at Citi, likewise emphasises the scale of the change brought by digital disruption. “The pace of digitalisation across all industries and societies is rapid and accelerating,” she says. “It’s a cultural and commercial phenomenon in every aspect, likely more so than for any other region.”

McKenney says the explosion in e-commerce across Asia is an accurate reflection of the fast-growing impact of digitalisation across the region. The Asian e-commerce market will be worth US$1.4trn³ by 2020; 59% of e-commerce transactions are currently via mobile⁴; and mobile wallet transaction volume is expected to total US$60trn over the next five years⁵. Eighty percent of Asian millennial purchases are influenced by social media⁶, while time spent on online shopping in Southeast Asia is twice that of US consumers⁷.

McKenney says digitalisation across Asia and the explosion in e-commerce means businesses are rapidly switching to direct-to-consumer models. At the same time, the payment landscape is becoming ever more digital. Even if there is a lot of cash in Asia, it is digitising at a much faster pace than anywhere outside the region, she notes, while banks, consumers, and merchants are increasingly shifting from batch to real-time.

Asia’s digital environment poses some key questions for treasurers, she says. “Firstly, what’s the impact of new business models on treasury? If your business is moving to sell direct to consumers, that means lots of new consumer payment capabilities, it means more real-time treasury management. Secondly, what opportunities are offered by innovation? And thirdly, how does treasury remain agile in this new landscape?”

McKenney points to Citi’s recent Treasury Digitisation survey, which reveals that amongst the over 70 treasury and finance respondents based in Asia Pacific, over half (56%) are exploring new digital technologies with a view to support the transformational change and development that is happening in their businesses, whereas a majority (64%) are doing so with a view to drive transformative development in their treasury function so as to enable them to assume a more strategic role within their enterprise over time.

Leveraging APIs

So, what are the new technologies that might impact treasuries in the near future? “APIs are here now, and their impact to treasury is expected to be felt over the next two years. At Citi we are investing heavily in them,” says McKenney. “They can help re-engineer workflows and provide real-time information.” She explains that clients can access their balances via API, with the information automatically populated into the treasury management system and constantly updated.

Results from Citi’s recent Treasury Digitisation survey reveal that over 55% of the respondents from APAC are currently exploring or pursuing API technology to obtain real-time visibility over their bank account balances. Treasurers are also exploring or pursuing APIs to facilitate payment status inquiries, initiate payments, and obtain credit notifications in real-time.

RPA, ML and AI

A lot of Citi clients are also focusing on robotic process automation (RPA), McKenney says. “It’s helping to automate manual repetitive processes, for example aggregation of bank statements and analysis of cash positions. Many manual tasks in the end-to-end payment process can be considered for RPA. We do see a lot of clients with keen interest in using RPA.”

As for a more tangible impact for corporates from machine learning (ML) and artificial intelligence (AI) to augment decision-making and improve control, McKenney is eyeing a timeline of one or two years. The present emphasis for APAC treasurers exploring or pursuing ML and AI appears to be on cash management and forecasting. “Citi itself has really made its big data platform differentiated now in terms of quality of data,” she says. “It’s able to provide more intelligent recommendations, whether it’s for cash application/collections reconciliation or to improve controls over payments.”

The bank is applying sophisticated ML and AI technology in its Citi® Payment Outlier Detection service, an advanced data analytics tool that assesses all transactions that flow through its system against a client-specific behaviour profile. It triggers real-time alerts for transactions that do not conform to the routine patterns and behaviours of the specific organisation. The service also constantly updates the client-specific profile to better detect future erroneous payment and potentially fraudulent events.

Blockchain

As for blockchain, McKenney regards it as more “bleeding edge than leading edge” and says it’s a technology that is very much for the longer term. She is, however, enthusiastic about its potential in, for example, digitising the documentation involved in payment processes or in trade. “One of the big potential benefits of blockchain besides being able to move an asset is that you can also be much more thoughtful about workflow organisation,” she says. “You can have different certifications by different parties along a workflow with common visibility of the status. That’s why blockchain is being looked at in trade finance, as an example.”

Real-time treasury

More broadly, McKenney expects that in three to four years, progress towards truly real-time, intelligent treasuries will be evident. “You’re going to have information that is available wherever you need it, whether it’s in TMS, merchant platforms or other systems,” she says. “There will be more flexible access and greater connectivity with banks for various information and transactional level initiations. There will also be smarter tools to manage cyber risk.”

While technology is destined to help define corporate operations in Asia, Citi’s global clients are clear with their operational priorities and how the bank can help them: “They want operational efficiency and balance sheet optimisation of all their treasury functions and capabilities. That’s always been the bread and butter in transaction banking and we’re very focused on helping treasurers do that.”

The other two are “super exciting objectives,” and relate to helping Citi’s clients grow and improve their own clients’ transactional and service experience. “It feels very rewarding to help our clients achieve sales efficiency,” comments McKenney. “Citi is helping them grow their business with our capabilities and plugging into all these new clearing houses and instant rails, paying into wallets, collecting from wallets. This, especially in Asia, will be a defining feature of business growth.”

McKenney adds that Citi supports a lot of digital and e-commerce clients, noting that creating a virtuous circle between them and their own clients is key to unlocking growth. “It is about making our services more flexible and embeddable to help make our clients’ clients’ experience frictionless and rewarding,” she concludes.

Footnotes

1. https://www.thehindubusinessline.com/economy/budget/govt-announces-more-incentives-for-businesses-embracing-digital-payments/article28293631.ece
2. https://www.worldometers.info/world-population/europe-population/
3. https://www.go-globe.com/e-commerce-asia-pacific/
4. https://kinsta.com/blog/ecommerce-statistics/
5. https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/05/consumer-currents-issues-driving-consumer-organizations.pdf
6. https://www.retaildive.com/news/study-80-of-gen-z-purchases-influenced-by-social-media/447249/
7. https://techcrunch.com/2017/12/12/google-southeast-asias-internet-economy-is-growing-faster-than-expected/