Asia is often recognized as a dynamic region that presents excellent growth opportunities for international corporations, and rightly so. But the dynamic quality of Asian markets can be a double-edged sword. Change can be difficult to stay on top of—and, more important, digest—for businesses facing unique opportunities.
This is no different for corporate treasurers than for other executives. Trying to run an efficient treasury model in Asia is challenging in some key ways. Barriers to efficient liquidity management are well-known, as some Asian countries place tight restrictions on the flow of funds across their borders. At the same time, however, the diversity of regulatory climates throughout the region presents significant opportunities for multinational businesses that are paying attention. Asia offers favorable circumstances related to faster payments and a higher degree of bank account rationalization than do most parts of the world.
Savvy treasurers who understand the regulatory nuances of different countries across Asia can better prepare their companies to take advantage of opportunities in the region.
Liquidity is a perennial concern for corporate treasurers everywhere, but in Asia efficiently managing liquidity can be particularly demanding. In an ideal world, companies would be able to set up a liquidity structure that incorporates their operations in all the relevant countries, enabling cash to flow seamlessly into a header account from business units around the region. In practice, however, this is not achievable.
The liquidity landscape is complex in Asia because the region includes many disparate countries, each with its own currency, culture, language, and regulatory environment. Further complicating matters, many countries in the region have restrictions that prevent or limit the effectiveness of liquidity management. For example, not all of the region’s currencies are freely convertible. Also, some countries prohibit the use of certain pooling structures.
The nature and degree of these restrictions vary considerably. South Korea, for example, has always been restrictive when it comes to pooling the won (KRW)—although it is possible to put in place automated cross-border U.S. dollar (USD)-denominated pooling structures.
Broadly speaking, the major economies of the region can be categorized as follows:
- Less restrictive markets: Australia, Hong Kong, Japan, New Zealand, and Singapore
- More restrictive markets: China, India, Indonesia, Malaysia, Pakistan, Philippines, South Korea, Taiwan, Thailand, and Vietnam
While there is movement toward relaxing some of the restrictions currently in place in Asia, the pace of change has been relatively slow, and recently there have been few significant changes. China, for example, has been moving for years toward making the renminbi (RMB) freely convertible, with recent developments including the introduction of automated RMB cross-border pooling. However, more recently there have been indications that China has begun to apply the regulatory brakes.
It is always important to seek advice from local experts in order to understand the extent to which operations in China, and in other Asian countries, can be integrated into regional or global cash-concentration structures. And as the pace of liquidity-related change slows, treasurers should consider looking beyond liquidity for optimization opportunities.
Faster, More Efficient Payments
Other areas of responsibility for treasury are changing much faster than liquidity management. Several Asian countries are revisiting their local clearing systems and cross-border banking connectivity, to improve their competitiveness as a destination for foreign investment. For treasurers, notable areas of interest include the development of real-time payments clearing, the digitization of payments, and the expansion of banking services to cover individuals who have not previously had access to traditional bank accounts.
Real-time payments is an area of considerable focus for governments in the region. India has opened up the market with initiatives such as its Immediate Payment Service (IMPS), an instant interbank electronic funds transfer service launched in 2010 that enables payments to be sent using mobile phones and Unified Payments Interface. Singapore’s Fast And Secure Transfers (FAST) system was launched in March 2014, bringing immediate bank transfers and debit requests. This was followed by the arrival of a real-time settlement platform in Sri Lanka in 2015. And the Philippines is currently exploring a real-time payment infrastructure for retail businesses.
For foreign corporations with operations in Asia, the arrival of real-time payments brings considerable opportunities, especially in collections. By speeding up the funds-transfer process, real-time payments give companies a real-time window into credit utilization. This, in turn, enables the company to make better use of credit with buyers and distributors. So better credit management is one potential benefit.
In addition, for organizations whose business models involve direct interactions with customers, real-time payments present opportunities to look at the customer experience, consider how collections are routed today, and consider approaches to strengthen the customer experience.
Even so, challenges can arise when a business attempts to take advantage of these developments. Some countries may have limits on transaction sizes, so the company’s treasury function may need to develop a more detailed understanding of the payments it is executing. Companies may also need to implement new technology, adopting real-time systems in order to take advantage of real-time information. The question is how willing companies are to change their processes in order to accommodate real-time payments—and how quickly they are able to do so.
Companies should also be aware that although considerable progress is taking place in some markets, the landscape remains heterogeneous, with developed and emerging capabilities varying significantly. Specific developments include the following:
- China. The Cross-Border Inter-Bank Payments System (CIPS) was launched in 2015, enabling banks to clear cross-border payments. In 2016, CIPS signed a memorandum of understanding with SWIFT, focusing on the future development of the platform.
- India. In addition to IMPS, in 2016 India introduced the Unified Payments Interface (UPI) system. Using the IMPS platform, UPI enables customers to send and receive payments through an app downloaded onto a smartphone.
- Indonesia. In November 2015, the Indonesia Central Bank launched the second generation of its payment system, SKN2, which brings feature enhancements and direct debit capabilities.
- South Korea. The Korea Financial Telecommunications & Clearings Institute (KFTC) was involved in the launch of a mobile wallet service in 2014 and the recent implementation of a real-time domestic foreign currency payment system.
- Malaysia. FPX is an online real-time payment solution that facilitates interbank funds transfers. In 2015, Malaysia also launched JomPAY, a national scheme for online bill payments.
- Singapore. Launched in 2014, the FAST service provides instant interbank transfers. The transaction limit was initially set at S$10,000, but the service can now be used for transactions of up to S$50,000.
Bank Account Rationalization
Rationalizing bank accounts is a priority for companies around the world. Both organic and inorganic growth can result in complex and unwieldy bank account structures, which many companies are now trying to streamline in order to reduce costs and improve control.
This is a particularly notable trend in Asia, where recent developments in some markets are presenting new opportunities to rationalize accounts. For example, certain countries require companies to hold bank accounts with local banks in order to make tax payments. However, some of these restrictions have recently been lifted, giving companies the opportunity to review their accounts and find opportunities for rationalization.
A number of countries in the region provide opportunities for companies to reduce their reliance on local bank accounts. As in other areas of treasury, these opportunities will vary from country to country and require a clear understanding of local practices. Examples include:
- China. International banks can integrate with local banks using host-to-host connectivity. They can also leverage regulatory changes in order to minimize their reliance on local banks for activities such as payroll payments.
- India. International banks can integrate or partner with local banks or third-party providers in order to extend their local coverage.
- South Korea. Local market practice has traditionally been for companies to hold a bank account at the same bank as each of the company’s buyers and distributors, which can result in high numbers of in-country bank accounts. This situation can be overcome by taking advantage of partnerships between international banks and local banks. Such partnerships can enable corporates to hold one account with an international bank and use the bank’s network to connect to the relevant local banks. It’s also worth noting that international banks can partner with local banks in order to provide certain auxiliary services, such as tax payments and promissory-note collections.
In other countries, such as Thailand, Indonesia, the Philippines, and Vietnam, recent developments have opened up opportunities to work more effectively with international banks. In the past, corporations needed to work with local banks in these markets due to nuances in regulations and local payroll practices. Companies also tended to use local banks for tax payments as well as for collections, in light of the stronger collections network for local banks.
However, the situation has shifted in these countries. International banks are making better use of the partner banking model, whereby they integrate with local banks in order to increase their collections networks and provide local flavors of payments, including tax and utility, and collections. As a result, international banks now provide enhanced tax payment capabilities and are making use of partner banking networks in order to improve their collection and payroll capabilities without the need for additional accounts.
Harnessing Knowledge to Tackle Both Opportunities and Complexity
It is clear that Asia is a complex environment for corporate treasury. Whereas companies operating in Europe will find it relatively straightforward to pool excess cash balances, consolidate bank accounts, and put in place efficient cash management practices, companies in Asia face considerable challenges in all of these areas.
Corporations operating in Asia, or considering doing so, need to have a clear understanding of the challenges and opportunities in each of the relevant markets. Even those treasurers who make a concerted effort can easily miss developments that would enable their company to operate more efficiently, because regulations are evolving rapidly in some areas. This is particularly likely for corporate treasury teams with very lean staffing.
Having a reliable source of information is, therefore, paramount if companies are to take advantage of emerging opportunities. While companies may rely on local finance staff for this knowledge, many are actively approaching their global banks or building out their treasury presence in Asia, in order to take advantage of information about local market conditions, where the pace of change is often faster. Such information can be a powerful tool in understanding how the regulatory climate is evolving in specific countries, and identifying developments and innovations that can be harnessed for the benefit of the company.
For multinational corporations, Asia presents both opportunities and complexity. Achieving a streamlined liquidity management structure can certainly be challenging. But by gaining a clear understanding of the markets in which they operate, treasurers can tap into the opportunities beyond liquidity, brought by new technology and regulatory change.
In many cases, the secret of success may be to work effectively at both a local level and a global level. On the one hand, companies need access to local knowledge and expertise in order to understand local nuances, restrictions, and developments. But at the same time, companies that can leverage relationships with global banks are better able to achieve a consistent approach, uniform processes, and clear visibility across the region.
By building strong relationships with international banks, and taking advantage of their partnerships with domestic banks across Asia, corporates become better placed to build a robust regional treasury structure.
Seth Brener is a director and head of Cash Management Corporates, Americas, Global Transaction Banking, at Deutsche Bank. Before joining Deutsche Bank, Brener spent 14 years at Chase Manhattan, where he helped the Corporate Quality group re-engineer processes and subsequently worked in sales and customer service management.
Joseph Mauro is a director and global head of market management for Trade Finance and Corporate Cash Management, Global Transaction Banking, at Deutsche Bank. In this capacity, he identifies, tracks, and analyzes trends that impact corporate treasury, including cash management, trade finance, regulation, and technology.
Views expressed in this article are those of the author individually and not those of their employer, Deutsche Bank AG.