Integrating Cash Management and FX for Global Growth

 

By Rahul Badhwar, Managing Director, Global Head - Corporate Treasury Solutions, Global Markets Corporate Services, HSBC

The economies of various developed and emerging markets look set for a benign period of growth [1]. Leading corporates are already responding by building out their international operations, while also evolving their business models to capitalise on the expanding global consumer marketplace. As a result, many corporates are finding themselves transacting ever more cross-border business, which is driving commensurate growth in their payables/receivables and FX activity. Rahul Badhwar Managing Director, Global Head – Corporate Treasury Solutions, Global Markets Corporate Services at HSBC, explains how in order to deliver the optimum result for a client's corporate treasury in this environment, a bank must be able to offer a holistic approach that combines cash management and FX. 

The global consumer marketplace: changing business models

One of the biggest changes certain business sectors have had to contend with in recent years has been the rapid evolution of the global consumer marketplace. The traditional business model for these sectors was to establish a local subsidiary that would sell to local retailers or distributors, who in turn would sell to the end consumer. In a world that has gone online and mobile, that is no longer the only channel that needs to be supported. Making sales direct to the end consumer has also become extremely important - and these consumers have a variety of options when paying for goods and services. Businesses need to ensure they can support consumers' payment choices to make the sale or transaction as smooth as possible – be it via a mobile wallet, credit card, smartphone or any other method. 

Additionally, these consumers are not bounded by country, they are global. This has obvious implications for FX management, because foreign currency transactions in this environment are real time and high volume, in contrast with the traditional retailer/distributor model. In this context, FX management also has an immediate link with customer payments. Individual treasuries are dealing with this in a number of ways, but most strategies probably fall into one of three broad categories:

• Ignore: growth is the overriding objective, so the collection solution deployed will not consider FX, as total sales growth is the primary target, not per customer net revenue. 
  
  
• Binary: the treasury either insists on customers paying in the corporation's functional currency, or always collects in local currency and manages the FX risk itself. 
  
  
• Advanced: local currency pricing is used to enhance customer acceptance, but is adjusted periodically in order to manage FX risk. This approach has the advantage of supporting customer perception that the company's products are local, while still enabling the treasury to manage the FX risk more precisely.
  
  

In the longer term, the advanced approach could be an option, as it may enable both revenue maximisation and risk minimisation. However, it also involves deciding on the frequency of local pricing adjustment, which requires balancing effective risk management against irritating or confusing customers with continual FX fluctuations. One approach is to analyse customers' e-commerce journeys using various metrics, such as the average period between customers putting items in their baskets and finally checking out. Achieving this equilibrium between risk and return is far easier if partner banks are able to offer an innovative approach and holistic solutions.

FX conversion and risk management

The opportunity within...

This need for holistic FX and cash management solutions doesn't just apply to corporates handling high volume online global consumer business. It is equally applicable to any corporate dealing with a large quantity of transactions in foreign currency, because there are two aspects to managing FX linked to payables and receivables: conversion/execution, as well as managing risk arising from these exposures. Significant inefficiencies can arise in relation to conversion because - depending upon industry sector - the number of transactions can be high and the average value of transactions can be modest. Therefore, the task of making manual conversions can be disproportionately onerous in relation to the benefit achieved. The resources used could be better deployed for more strategic FX activities, such as managing the risk associated with payables/receivables or M&A, or balance sheet hedging. 

One alternative is to hive off the high volume conversion of FX transaction tickets to a bank that can offer transparency and automation. In the case of payments, all the client has to do is submit a single payment file, with the currency for each payment indicated. The process is similarly low touch for corporates handling a high volume of FX transaction tickets for inflows (such as those active in the global consumer marketplace), with the bank providing automated conversions of receipts. In both cases, being able to deal with a single bank across multiple countries is a significant advantage, as the resulting consistency of user experience and data simplifies matters from a client perspective.

In addition to clarity over the spreads charged, solutions for these types of transaction should also aim to provide automation that can assist treasuries in increasing their straight-through processing rates. Furthermore, some clients also require that FX rates be held for a specific period of time, anywhere from 30 seconds to 24 hours. 

Clients are driving these innovations in order to support rapid growth, such as those already active in the global consumer marketplace, or traditional companies looking to make use of the new technology. Whichever the case, clients are likely to benefit if the bank concerned is able to deliver a consolidated approach and solutions across both foreign exchange and cash management to help them solve their challenges.

Nevertheless, segregating FX conversion and FX risk management can be a complex task. Corporations that have evolved over many years may have multiple intertwined FX and cash management processes and systems that can be difficult to separate. By contrast, younger corporations will often find it easier to segregate the two activities. 

 

Notes [1]
https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
https://tradingeconomics.com/china/gdp-growth-annual
https://www.bloomberg.com/news/articles/2017-10-26/ecb-is-said-to-see-option-for-ending-qe-with-short-taper-in-2018-j98rkvcn
https://www.bloomberg.com/news/articles/2017-08-18/malaysia-s-gdp-growth-beats-forecasts-as-economy-expands-5-8
https://www.ft.com/content/ab8f0035-6ed9-3fce-9781-f6d6fe52fd5d

 

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...and how to grasp it

Given that corporate treasuries are often lightly-resourced, this is an area where the right banking partner can be extremely valuable, but this goes beyond just being able to offer the right products and solutions. A bank that can provide a supportive approach based on a deep understanding of the corporation's global flows should be able to suggest a practical means of segregation. Once that is established, its transaction banking arm can deliver additional expertise in such matters as least cost routing of payments and any (re)structuring of bank accounts needed. If it can provide qualified experts in enterprise resource planning (ERP) systems, treasury management systems (TMS) and SWIFT, it can also provide practical assistance with any necessary system changes. Coupling this with FX expertise in matters such as algorithmic order execution further enhances the client benefit. 

Both disciplines, FX and cash management, are integral to a successful outcome, so they need to work closely together on the client's behalf [2]. Furthermore, in view of the cross-border nature of large multinationals' flows, they need to do this on a global basis. Therefore, if the optimal solution is to be achieved, multiple sources of in-country expertise need to be delivered to global or regional treasury via a single coherent channel. Rolling things into a single consistent global proposition in this fashion is essential, because corporate treasuries do not wish (nor typically have the resources) to waste valuable time contacting individual bank departments around the globe and then trying to weld a solution together themselves. 

Transparency and support

Once the conversion of relevant FX transactions has been migrated to a bank, it should become a relatively low touch activity for corporate treasury, as it will be fully automated. However, while treasuries may no longer need to preview the rate for every individual transaction, transparency is still essential. 

Another key bank service, which tends to be more important for larger FX transactions is client information support, such as when a client needs to establish a hedging policy for the first time. It is therefore important that the partner bank is able to walk treasury through the mechanics of setting up a hedging policy and the sort of scenario analysis that might be needed before presenting a potential policy to senior management. A similarly important area of information support (of which more below) is often regulation. 

Nevertheless, client information support for multinationals' strategic FX management typically isn't just about FX, it also encompasses transaction banking. For example, depending upon local regulation, the funding for a large foreign direct investment may need to be routed into a country in a certain way and paid into a specific type of bank account. The bank needs to know the correct details of this procedure and be able to open the appropriate account within the required timeframe. This yet again underlines the need for a bank to be able to deliver a single holistic global proposition across both cash management and FX. 

 

Sector Specifics: Natural Resources and Utilities Case Study  As part of being able to make guidance and solutions client-specific, banks also need to have sector-specific FX and transaction banking capabilities that are tightly coupled. In order to do this, they have to traverse a broad range of diverse industry sectors, each with different needs.  A good example of a sector that has very distinct FX and transaction banking needs is natural resources and utilities (NRU). As a general rule, NRU treasuries are highly centralised, so payments and receivables for a new remote acquisition or investment are (to begin with at least) likely to be handled at a head or regional office level. This makes it essential that the transaction bank concerned is able to draw together expertise and execution capabilities for local transaction banking and FX efficiently, and deliver it in a focused manner at a centralised level. The primary currency of the NRU sector is USD, which given the global nature of the business, makes FX translations a fact of life. These translations could be for reasons ranging from outbound investment, to the repatriation of dividends, to everyday supplier payments. As a result, in HSBC's experience, the vast majority of discussions with NRU treasury clients have both FX and transaction banking components, making a homogenous approach across the two disciplines essential. M&A This is particularly important in the context of M&A activity, which is commonplace in an NRU sector that (despite a recent slowdown) has still posted more than USD900bn of deals over the past three years[7]. Such activity could expose the buyer and/or the seller to significant FX risk, which if left unmanaged could impact the economics of the deal. Clients thus need a bank that can work with them on finding a suitable solution. When the deal completes, a new set of challenges emerge. The settlement transaction can be quite complex in nature, because the buyer might have to assemble the necessary funds from various regions/entities, or because of tax considerations. Therefore, funds may have to flow through multiple jurisdictions before reaching their final destination. Given the time-critical nature of the transaction, it requires considerable transaction banking expertise to ensure that this operation runs smoothly.  Experience and evolution While many long-established NRU multinationals in developed markets will already have extensive international experience, this is not usually the case for the newer breed of NRU multinationals from regions such as Asia and the Middle East. These corporates consequently face considerable challenges as they invest in new markets. For instance, an Asian NRU multinational that acquires a Mexican drilling licence is unlikely to have extensive in-house expertise on the peso or on local payment systems and regulation. As a result, it is advantageous to have the backing of a banking partner that can quickly deliver end-to-end solutions in areas such as multicurrency global disbursements or hedging policy.  However this is only the first stage. Over time, the corporate may elect to set up an in-country finance function and capitalise its local entity. Making this migration successfully requires a bank that can deal professionally with both transactional and strategic elements. On the strategic side, the capitalisation might involve managing a significant FX translation, as well as making the resulting local currency payment in the most efficient manner. On the transactional side, the new in-country finance function will need to be set up with all the necessary banking systems and connectivity.

 

Notes
2 Unfortunately, this is not always the case in the banking industry, where individual disciplines have historically tended to be siloed separately.
7 https://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-e-r-oil-gas-m-n-a-report-yearend-2017.pdf

 

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Reaching new markets: the shifting regulatory landscape

The emerging market difference

While emerging markets offer attractive business opportunities, their regulatory landscape is typically very different to that of more developed markets. One key differentiator is the frequency of regulatory change, which can be higher. 

Given that much new emerging market regulation straddles both FX and payments, this is another area where a bank needs to be able to provide holistic solutions. In the case of corporations entering a market for the first time (or making a substantial new investment), very specific rules may apply to how the investment can enter the country. It may have to be made as equity or an intercompany financing and there may also be specific requirements for how/when it must be translated into local currency. In addition, there is the matter of arriving at the right hedging framework and whether hedging can be done onshore, or whether it will have to be conducted in the offshore market.

Regulatory relationships and proactive communication

In order to deliver the best client experience, and particularly where a bank has substantial operations in a country, it should ideally also have deep insight into local regulation and transparent relationships with regulators. 

This is particularly valuable when it comes to new regulation, where the bank can rely on its previous experience to provide insight, or can approach the regulator for clarification of detail and/or applicability. This may be an iterative process that takes a while, but the critical point is that the client needs to have a high level of confidence in the correct interpretation of the regulation before it takes any action.

If the bank offers holistic FX and transaction banking coupled with a consultative approach, it can be more proactive in determining the implications of new regulation. In an ideal world, corporate treasuries should not have to approach their bank on this, their bank should be approaching them with business-specific guidance on the FX and transaction banking implications. In addition, where the client has follow-up queries, the bank should be able to respond rapidly. Again, this is more likely to be the case where the bank has substantive local operations and experience. 

Nevertheless, a conversation that might initially relate only to FX will often move onto related transaction banking matters (or vice versa). By the same token, it might also extend to other jurisdictions where the client business might be indirectly affected. This further underscores the importance of a banking partner that can provide joint FX and transaction banking expertise across multiple jurisdictions (including key emerging markets) but can also focus this to a single point of delivery as required by the client.

Regional/country themes: from Brexit to BRI

In addition to the broad generic themes that are driving the requirement for a combined approach to FX and cash management, there are also a number of regional/national themes that further accentuate this need:

Brexit

Various corporations are currently trying to decide whether to stay established in the UK or to set up a new presence on the continent and change base currency. Accomplishing the latter without disruption requires the support of a bank that has a comprehensive network, integrated FX and transaction banking expertise, and can also supply capital if required.

US tax reform

The top 10 companies in the S&P 500 collectively hold ~USD700bn offshore [3], while for US corporates as a whole, the figure is ~USD3.1trn [4]. The nature of the US tax breaks recently announced is likely to prompt a proportion of this - some of which is not held in USD [5] - to be repatriated. 

Accomplishing this in the most efficient manner possible, whilst also minimising any potential market impact, requires the assistance of a banking partner with experience of handling large event-driven transactions of this nature. It will be able to provide a network capable of handling the necessary international payment(s), while also delivering the FX global markets expertise to achieve the best possible conversion rate for the client. 

Payments, sanctions and cyber security 

The US administration is currently placing considerable focus on who is making payments to whom and the correct application of payments screening. A related challenge is cyber security, which is a major challenge in an environment where sophisticated online criminals are specifically targeting large corporations. In both cases, partnering with a bank that has robust payment screening systems and security can help to mitigate risk.

China's Belt and Road Initiative (BRI)

The scale and scope of China's BRI investment (USD124bn investment and 60+ countries [6]) has major implications for businesses around the globe. The sheer diversity of the countries involved and the potential complexity of traversing them, makes the associated treasury management extremely challenging. 

The treasuries of corporates that are looking to seize BRI opportunities are likely to experience rising FX hedging and transaction banking activity, quite possibly in unfamiliar locations. Collaboration with a bank that has substantive physical presence in China, plus the associated BRI countries, will therefore be essential across a range of activities. Apart from account opening, product capabilities and comprehensive understanding of local regulation, these also cover areas such as facilitating access to cross-border funding and FX hedging across offshore/onshore markets. As before, the ability to link multiple jurisdictions to deliver a consolidated solution will be imperative. 

 

Notes
3 https://www.bloomberg.comhttps://www.treasury-management.com/graphics/2017-overseas-profits-tax/
4 https://www.bloomberg.comhttps://www.treasury-management.com/graphics/2017-overseas-profits-tax/
5 https://www.cnbc.com/2018/01/18/apple-and-others-bringing-home-foreign-cash-may-boost-the-dollar.html
6 https://www.reuters.com/article/us-china-beltandroad-quad/australia-u-s-india-and-japan-in-talks-to-establish-belt-and-road-alternative-report-idUSKCN1G20WG

 

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Looking to the future

Corporate treasuries are increasingly interested in rolling out 'one touch' technology that cuts the number of stages involved in completing a task or process to the absolute minimum. A vital step towards achieving that ambition is reducing the number of separate systems and interfaces in their process flows. In addition, many treasuries are now looking to their banks to assist them with the rapid integration of technology, obtaining better business intelligence from their own data, and accelerating their flows by leveraging innovations such as the new breed of instant payment systems. 

So what do these expectations imply for banks? Treasuries are definitely not interested in having to connect and log into multiple separate bank systems, so they expect banks to rationalise their interfaces, such as by integrating FX functionality into transaction banking platforms. Banks also need to offer qualified niche expertise in areas such as ERP, TMS and SWIFT, including their integration with instant payment systems, as these evolve from domestic to cross-border capabilities.

Conclusion

As corporates expand and evolve globally, their treasurers are finding historic banking demarcation lines increasingly irrelevant and inefficient. Treasuries now need to combine their payment flows with their FX management, so they understandably expect their banks to be able to support this integrated approach. For banks just to pay lip service to this requirement is not enough, they have to prove this through practical action. If the bank can apply this combined expertise approach across a global network and deliver it wherever needed, then the client's global growth loop can be closed to best effect.    

 

Rahul Badhwar Managing Director, Global Head - Corporate Treasury Solutions, Global Markets Corporate Services, HSBC Rahul Badhwar has been with HSBC for over 20 years. He started his career with HSBC out of business school in Mumbai in a variety of Flow & Derivative Sales and Trading roles, including being the FX Technical Analyst for the group. In 2004 he moved to Dubai to run HSBC's Corporate and Institutional Sales business for the Middle East. After about 3years in the Middle East, Rahul relocated to Hong Kong as Head of Structured Derivative Marketing. Shortly thereafter in 2007, he took on the responsibility of Head of Corporate Sales for Asia-Pacific (ex Gr China). Rahul has a Bachelors in Economics and an MBA in Finance & Marketing. In 2016 Rahul became Global Head of Corporate Treasury Solutions and relocated to London.