A perfect storm

Published: Mar 2015
Stormy sea with lightning

If ever a market was ripe for picking then it has to be the one for the treasury management system (TMS) in Asia right now. Growing economies, more corporates entering the market, few vendors with which to compete, and a largely untapped source of prospects. Can it really be this simple?

The TMS has been around since the 1980s and in that time has progressed from a relatively simple cash management tool into a sophisticated multiple-function platform. In Europe and North America, a proliferation of vendors came and went as the industry carved a niche for itself before engaging in an intense burst of consolidation in the late 1990s and early 2000s and again towards the end of the last decade. Today, just a few providers remain on the international stage. Although more localised and specialist sector vendors still ply their trade, it is often in the face of competition from the major players that boast established (but sometimes quite confusing) product sets and deeper pockets to support technological and market expansion.

For all vendors, the Asian TMS market is still in a state of development. The businesses most likely to consider such a solution – large international corporates and domestic players with international aspirations – seem to be dictating the direction of the growth of the TMS market in that where a system is implemented it will more than likely be from one of the big international vendors.

The key players

All of the ‘usual suspects’ seen in the global market place have an Asian presence, typically in the region’s key commercial centres. In terms of deployment, the Treasury Today 2014 Asia Pacific Corporate Treasury Benchmarking Study reveals that SAP’s treasury module, IT2 (now part of Wall Street Systems) and SunGard’s AvantGard (Integrity) are most frequently cited, followed by Wallstreet Suite, SunGard Quantum, Reval, Kyriba and 360T (the latter being a niche trading platform).

As with the European markets, some regional vendors are in the hunt and this short list includes Singapore’s CS Lucas and Australia’s Visual Risk (the latter now branching out and making inroads into the European market). As an aside, there are also a number of vendors in the extremely well-developed Asian (and largely India-based) banking back office supplier space. Players such as TCS, Oracle FSS and Infosys offer treasury tools but these are geared to the banking sector within which they are typically just a small part of a much broader suite of functionality.

Of course, some of the tier one global banks – such as Bank of America Merrill Lynch and Deutsche Bank – offer regional treasury functionality to corporate clients, usually via their global transaction services divisions. In addition, some of the Asian regional banks are now offering treasury services too. China Merchants Bank, for example, delivers treasury management tools for its large corporate customers such as Shenzhen Energy Corp and China Shipping. The bank’s offering, it says, covers a range of core treasury functions in a centralised fund management environment across a virtual private network.

The increasing attention paid to the Asian markets by the specialist vendors has stirred the interest of more general financial technology providers. China’s largest ERP developer, Yonyou Software, has entered the treasury field – offering GL tools for reconciliation, P&L statements, balance sheets, and cash flow statements. Yonyou claims it works with over 60% of China’s top 500 enterprises; it also has offices in Japan, Hong Kong and Thailand and an apparent will to develop the depth of its corporate relationships across a broad client base.

Market movement

The US and European TMS market is hardly saturated but with flat economies in these regions and the level of economic growth over the last few years in the Asian markets, it is not hard to see where the next big push will be. Indeed, a measure of Asia’s growth potential is demonstrated by the ever-expanding community of international and global companies now operating in the region – a number of global corporates are now running in-house banking and shared service centre operations in the liberal APAC countries, for example. Today, around 30% of the total global economy flows out of Asia.

For corporates operating in the region, new markets will almost certainly mean increased financial and commercial complexity. As cross-border transactions ramp up, there will be increased exposure to different taxation structures, new regulations, currencies and cultural influences. All of these can conspire to put pressure on treasury concerns such as cash visibility, cash flow forecasting and cross-border liquidity, bank connectivity (particularly around standardisation of file formats and protocols), foreign exchange (trapped cash is a noted issue), counterparty risk and even payment cycles.

The right tools

The bottom line is that technology can become a lifeline for many treasurers because the right products can limit or remove these issues. However, the Asia Corporate Treasury Survey 2014 by PwC revealed that more than 50% of respondents did not have a TMS in place, and those that did were only using the basic functions. This is odd because 29% said they operated within geographically dispersed businesses covering six or more countries in the region, with 31% overseeing operations between two to five countries. In essence, few have the right tools and yet many are in dire need of help.

Delving deeper into the technology issues, Treasury Today’s 2014 Asia Pacific Corporate Treasury Benchmarking Study uncovered this shortfall, highlighting the fact that implementing a cash flow forecasting solution was the number one urgent requirement, followed by a system to improve treasury’s visibility over company cash. Implementing a full TMS was a priority but some treasury operations have not even reached the start line: in response to a question about which systems will be installed in the next 12 to 18 months, one respondent said “none” as their treasury “requires greater centralisation before technology can be overlaid.”

Despite the increasingly urgent need for technological assistance, there seems to be a degree of dissatisfaction with and/or misunderstanding of TMS technology in Asia. The PwC 2014 survey revealed that 49% of companies using a TMS were not entirely happy with their current system. Just 9% of respondents associated risk management with a TMS and only 30% used their TMS for risk and position reporting. Again, the Treasury Today study went deeper, asking respondents to reveal the areas that they felt were most urgently in need of improvement in their system. The top five issues covered the basics: cash flow forecasting (as the top priority), then reporting, accounting, reconciliation and pooling.

Notwithstanding the issues (which could equally be the vendor trying to shoe-horn a broad-based system into a local market or just a training-related matter), there is a general realisation amongst businesses in Asia that as they grow, the importance of IT rises up the agenda. Some are responding to this, with 20% of the Treasury Today study participants in charge of an annual technology budget claiming they had more than $250k at their disposal – one respondent said this figure had recently increased “due to the offerings in automation and standardisation” but added that every purchase was subject to return on investment (ROI) analysis.

Growing into the system

The expansion of a business will have a knock-on effect in terms of how its treasury is structured, what is required of it and, eventually, the kind of technology it is likely to need to fulfil its role. In terms of the evolution of treasury, technology is a facilitator. It allows expanding Asian treasury units (expanding in terms of both reach and responsibility) to concentrate more time on value-added activities and less on the transactional. As the level of usefulness and professionalism increases so too do the responsibilities: it is (hopefully) a virtuous circle of growth.

TMS users in the key financial centres tend to be the offspring of vast North American and European companies that have chosen to locate in Singapore, Hong Kong or Malaysia largely because of their respective government’s tax-led incentives for treasury centres and because each has a well-established technical infrastructure and the ready availability of skilled staff. Indeed, PwC’s survey results showed that treasury technology adoption is dominated by large organisations (61%), with the vast majority of these being based in Singapore, Hong Kong or China (China has only recently begun to liberalise its currency but the main attraction for corporates is the sheer size of the market).

Only 25% of small and 44% of mid-sized companies had implemented treasury technology, the decision most likely being a result of budgetary constraints or the simple fact that they do not yet have the complexity or volumes to justify the cost. It could also be a matter of circumstance. Traditionally in Europe or the US, much of the ROI is predicated on automation and improving productivity; firms are effectively just saving on personnel costs. In a low-cost labour environment as may be found in the emerging markets of Asia, that cost saving is less relevant. Around 75% of companies in Asia without a TMS continue to rely on spreadsheets as their main treasury management tool. The business case to acquire a TMS is thus different in Asia; increasing treasury complexity is likely to be the trigger.

The path to TMS

The uptake of the TMS has a clear linear relationship with the openness and complexity of the market in which the organisation is operating: complexity drives the need for technological help. A company that has no more need than to check its bank accounts once a week has no business case for a TMS; if it is looking to protect assets, align liquidity with where the needs of the business are and generally discharge the typical responsibilities of treasury, then a TMS may have a role to play.

The model that typifies the progress of a basic treasury function to one of strategic value follows a common path. Starting with a transactional treasury unit, the focus will be on the fundamentals such as short-term cash management, bank account management and execution of necessary transactions. As a business grows and its geographic reach extends, treasury may evolve to a more process-efficient unit that can optimise the local use of cash and liquidity and develop process efficiencies, typically aiming for a higher degree of straight through processing (STP). This might be the first point of consideration of a TMS.

The next stage of evolution is the value-enhancing treasury where it effectively discharges its core responsibilities but also exploits concepts such as the shared service centre (SSC), netting centre and regional cash pool to help the overall business achieve its strategic goals (bearing in mind that some of these are not permissible in certain jurisdictions). The final stage will see the rise of the strategic treasury in which it takes an active role in the development and delivery of the company’s strategy, providing financial leadership over matters such as funding, banking relationships and risk management.

The fact that having a professional treasury for many Asian companies is a relatively recent phenomenon gives them an interesting ability to quickly move ahead of the kind of development curve seen in Europe or North America. Asian firms are afforded the opportunity to analyse best practices developed by their overseas peers over the past couple of decades and apply them over a relatively short period. However, the quest to run treasury on best practice lines does tend to steer companies towards the long-established international vendors which will have already incorporated those practices into their system. This is particularly so if the client is seeking to expand its operations into the European or North American homelands of those vendors.

The ability to look at and learn from an existing market is something that the shrewd vendor should have exploited when seeking to tackle Asian TMS delivery. Treasurers in any part of the world tend not to be early adopters of technology so where other business functions in the region may trail-blaze with new concepts and models, particularly with delivery models such as the cloud, treasury technology vendors have had the opportunity to watch, learn and shape their own response accordingly.

New players? Unlikely

The reason a treasury in Thailand, for example, is likely to be looking for a TMS in the first place is because it has experienced growth and complexity, so now lacks the visibility and control for its international or global operations. It will look at its peers and see which practices and systems they are using, and it is this that will possibly drive its own expectations of the kind of technology it needs (which in all likelihood in this case will not be a Thai-specific system). If most corporates in the market for a TMS need more than just local requirements, it follows that it is unlikely the market will see a sudden rush of local players climbing on the bandwagon.

Even though there are major software firms (such as China’s Yonyou Software, mentioned earlier) that operate successfully across a number of verticals, the barriers to entry to the TMS space are extremely high, with few if any new vendors having emerged in recent years in any geography.

Does this mean the international players have the run of the Asian markets? To a degree, yes it does. But those vendors seeking to enter a new Asian market will not have an easy time of it: they will face unique challenges. The key to success will be its capacity to understand and respond to local issues. In Asia, language is going to play a key role in any progress. Singapore or Hong Kong may accept English-only, but no vendor will get away with that in China. This applies to the product, which has to be offered in the local language, and to service delivery too. There may also be culturally-based expectations around delivery too. Just as a US or European vendor may be expected to identify the business patterns and culture for each market and be able to align itself with those expectations, so it should expect to meet local Asian needs. Failure to understand will almost certainly see the vendor sailing into a headwind and possibly failing.

Investment in the market by the vendors is thus essential because of the prevalent business culture that demands localisation and people on the ground to make the deals and to support the clients thereafter; the personal touch counts for much in Asia. Being in the Asian markets also demands a detailed knowledge of the regulatory environment which may require a different set-up for each country – for example, the requirements around the way data is hosted and transferred cross-border under local data protection laws. Regulatory diversity in Asia is as much a challenge for corporates and banks as it is for the vendors.

An attractive proposition

That said, the potential in Asia for all stakeholders is huge. The reason it is a target for the major international TMS vendors is simple: economic growth attracts corporates and as those corporates gather momentum and acquire more treasury complexity, a TMS becomes an ever-more likely proposition. Asia is experiencing economic growth (even if the pace has slowed a little). As a largely green-field site in terms of current levels of TMS adoption, the region presents itself as the perfect opportunity for vendors – and if they are keen to make headway this perhaps is the perfect time for treasurers to test the water too.

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