Convergence of Trade Finance and Cash Management.Indd

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Convergence of trade finance and cash management www. iflexsolutions .com

by Nancy Atkinson cash availability and the ability to make better advantages. These advantages derive from judgments regarding financing options. utilizing expertise in information technology, Banks are looking for new ways to support operations, customer service and re-purposing their corporate clients. As services become Figure 1 represents a sample of some of the expensive platforms. commoditized, banks realize that there are activities and the reporting relationships tangential services to those that they currently involved in working capital management in How do banks fit into working capital offer that would expand their portfolio of a corporation. As can be seen, the financial management? products. By adding these services, banks’ professionals in the corporation are dependent Within banks, trade finance, foreign exchange value to corporate clients would be enhanced. on information and activity from the purchasing and cash management are all used to support Further, banks are beginning to identify related and sales sides. Cash forecasts depend on past corporations’ financial professionals. Trade services that have been supported in silos, and trends and current activity. In order to optimize finance provides liquidity for raw materials, in- the use of cash for the corporation, accurate they are working towards consolidating these process manufacturing, as well as factoring or and timely data is critical. Data comes from services. Trade finance and cash management discounting of corporate receivables. Foreign internal and external (notably bank) sources. are two key areas for both of these approaches, exchange is a consideration in international and both impact working capital management While corporate client support is the main trade, which is growing exponentially. It may for corporations. driver of banks’ interest in converging trade be used as a hedge against changes in currency finance and cash management, there should for the duration of a contract for goods and/ Why is convergence desired? be an internal driver as well. To the degree or services. Cash (or treasury) management

Working capital management is the point of that banks can leverage existing systems to provides services to support payables, convergence for the activities of corporate interface with clients, there are efficiency receivables, and treasury activities. Within financial professionals. Finance departments

tend to be structured by function, as is the Figure 1: corporate activities impacting working capital management case for most organizations. Demands are �� increasing for these roles to bring strategic �� value beyond the performance of their specific �� duties. As organizations streamline staff, some �� traditional silos deteriorate. To be strategic, �� individuals must understand the implications �� of their functions and how they relate to the

total organizational goals. �� Corporate treasurers have the responsibility to �� determine whether the investment or borrowing �� of cash meets the needs of the corporation’s �� operations. Optimizing the balance of investment rates and time frames against �� the need for cash is dependent on accurate �� forecasts of cash needs. As trade finance �� and cash management are both components of working capital management, having a �� composite view of these areas provides the �� corporate treasurer better forecasts regarding Source: Aite Group Convergence has to be based on the real needs of clients, which and influencers are reached through team includes timely and accurate access to the data and information selling, the total value of a common relationship that they require. with a given bank becomes clearer.

The development of marketing messages that each of these activities, banks collect account also provided. Further, banks frequently emphasize the value of the bank in supporting balance information and supporting data for provide overnight options in the form of cash working capital management at each of its posting to accounts payables (A/P), accounts sweeps for investing or borrowing against an touch-points is another opportunity. These receivables (A/R) and treasury workstation established credit line. messages should be supported with automated systems. Either cash information or actual or manual processing and with customer What does convergence mean? cash may be consolidated across a number of service to resolve common issues, making the banking relationships for the corporation. The Convergence of trade finance and cash interfaces seamless for the client. more real-time and complete the delivery of management can take many forms. No matter Ultimately, the vision is for banks to make information, the easier and better the corporate how advanced a bank may be, convergence is their internal structures transparent to the treasurer’s performance is deemed. an iterative process and is currently in an early corporate clients. Banks do not have to merge stage. Traditionally, trade finance at banks has operations and systems to reach this goal. They been part of a commercial lending area. The Total convergence implies consolidating banks’ do need to coordinate closely and ensure that sales team is comprised of trade experts sales, marketing, operations, customer service, information from unique internal systems is that configure relatively unique solutions to and systems that support trade finance and gathered and presented to the corporate user match the needs of clients. Similarly, staff cash management. Total convergence should in a consolidated and useful format. in trade finance operations require expertise not be the goal, however. Convergence has to What are evolving bank solutions? in regulatory and international compliance, be based on the real needs of clients, which as well as familiarity with trade terms and includes timely and accurate access to the In the area of trade finance, the trend to move processing. data and information that they require. away from bank-supported letters of credit (L/Cs) by large corporations is causing a void Cash management has been part of banks’ Early adoption includes interfacing foreign for banks. Banks are looking for ways to apply treasury services. Within cash management, exchange (FX) systems with cash management their capabilities to support open account both the operational structure and the payment initiation or receipt and reporting transactions. Purchase-to-pay solutions are product-management organizational structure systems. Over the last 10 years, this integration an effective service solution. These offerings tend to be divided into payables, receivables, has accelerated through front-end interfaces capture purchase order images or information and treasury management. with corporate clients that make payment

In the payables area, banks provide payment Team selling is another method of beginning to bring trade finance initiation in a variety of formats. They also and cash management together. To the degree that all decision provide risk controls ensuring the recipient makers and influencers are reached through team selling, the of the payments is correct, and provide total value of a common relationship with a given bank becomes opportunities to fund payables accounts as clearer. payments are presented for collection. In the receivables area, banks provide payment initiation a one-stop function by incorporating and match them against invoices. Frequently, collection services (lockbox, electronic receiving and negotiating FX rates. However, workflow to route information for exception payments). Additionally, banks send the operational staff, customer service, sales and resolution or approval is incorporated. remittance information to their clients to marketing have been maintained as separate Ultimately, banks may use the information match payments against invoices. In treasury units associated with either FX or cash regarding status of orders prior to payment to management, banks provide data exchange, management. aid in the offering of new trade instruments. which aggregates information regarding balances at all of a corporation’s banks. Team selling is another method of beginning Some banks are investing in peripheral Generally through online services, reports to bring trade finance and cash management services that support other components of on historical trends and current activity are together. To the degree that all decision makers corporations’ supply chains. JP Morgan Chase’s investment in Vastera is an example gain a greater understanding of their client’s move towards working capital management of reaching into the logistics area, while working capital needs and will be able to offerings will have competitive advantages Mellon’s acquisition of SourceNet provides strengthen their relationships with their clients over those that maintain disparate product reach into accounts payables processing. In and service them with new products. sets. In the next five years, banks will create both situations, the banks are gaining access the necessary linkages to make convergence a Conclusion to information about and for their clients to reality in terms of providing the relevant data which they had no prior connection. As they Convergence of trade finance and cash to clients in nearly real-time and in a format use the power of this new information and management largely remains a concept. It that is meaningful for the corporate user, develop client-centered solutions, they will is a concept with merit, though. Banks that regardless of the bank’s internal structuring.

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