Payments and Cash Management in Romania
Since Romania’s revolution when the Communist regime was overthrown in 1989, the country has been taking ever-closer steps towards full integration with Europe’s economy. Romania’s most important recent political event was its accession to the European Union (EU) on 1 January 2007, which allowed the free circulation of Romanian services, funds and human resources inside the EU area. This places Romania in an advantageous position for trade between the EU, Turkey, Russia and the Middle East. From a financial and banking industry standpoint, the positive results of accession have been greater volumes of foreign investment together with investors’ commitment to longer tenors. It is also expected to lead to more competition among banking service providers. The impact of other political events has been minimal with limited influence on the banking market.
The introduction of the international bank account number (IBAN) in Romania in 2004 was seen as a major step towards standardisation and automation of the country’s payments industry. Following this, the implementation of the electronic payment system in 2005 allowed for far more efficient electronic clearing of payments and, as a result, the country’s banks saw increased corporate demand for secure and reliable online banking applications. One of the challenges for local or regional banks in Romania, however, is the lack of investment in electronic payment channels, and many local banks tend to offer off-line and out-of-date banking applications. They compensate for this by offering cheap paper-based payment instruments but the growing cost of labour is putting pressure on the profitability of paper-based payments. Salaries in Romania’s banking sector are increasing by approximately 20% year-on-year so cheap labour cost is no longer a competitive advantage. An emerging trend is that local or regional banks are now processing 80-90% of the country’s paper-based payments, while international banks are processing approximately 90% of the electronic payments market. As a result of this imbalance, local banks are now seeking to upgrade their electronic payment systems and move to solutions with secure online capabilities. This is one of the most important trends in the Romanian banking industry, according to Lucian Horsa, banking operations manager at telecom company Orange, in Romania. Horsa says: “These systems can interact with the accounting software, the bank statement can be exported and a payment file can be imported. In terms of electronic banking systems, we are now using an online payments application, based on Internet access and protected by a smart card. In the previous version of the banking application, the communication processes were achieved first by modem and after that by TCP/IP connection, with no real time data updates.”According to Horsa, the most common payment method used at Orange in Romania is transfer order, which is transmitted electronically to the bank, while direct debit is increasingly used for collection from customers. The total number of direct debits used in Romania increased threefold between 2003 and 2004.
Banks in Romania are now focusing on automating the data exchange between their electronic banking channel and the corporate client’s enterprise resource planning (ERP) system or other internal application. However, harmonising Romanian electronic payment standards with international payment standards is an ongoing challenge.
The use of cash in business-to-business payments is very limited (less than 1-2%). The number of cheques and promissory notes used is still high, although the volume amount is decreasing. The central bank (National Bank of Romania – NBR), Transfond (owned by the NBR, which has a 33.33% stake, and the top 25 banks in Romania) and international banks are working together to introduce a more efficient clearing system for cheques and promissory notes – it is due to be implemented in 2008.Cash represents approximately 95% of the retail payments in Romania. NBR has only four cash-processing centres in the country and consequently the logistical cost of cash payment is borne by the banks.
The retail market has seen a rapid growth in credit or debit card payments but at the moment, these are not accepted everywhere and cash is still the most common payment instrument. There are more than nine million cards (mainly debit cards) issued in Romania currently – which is about 420 cards per 1,000 inhabitants. Corporate cards comprise a very small percentage of these cards and the corporate cards business is growing slowly due to the lack of infrastructure for such payments in the business-to-business sector.
Clearing and settlement of the local currency, the Romanian new leu (RON), is organised by Transfond, which offers four same-day-value clearing and settlement systems (the first three are part of the electronic payments system). They are:
Payments are processed in SENT, ReGIS and CCI as follows:
| Number | Volume | |
|---|---|---|
| SENT | 85% | 4% |
| ReGIS | 2% | 94% |
| CCI | 13% | 2% |
Evolution of payments number and volumes in 2006 vs 2005
| Number | Volume | |
|---|---|---|
| SENT | 9.4% | 12.25% |
| ReGIS | 27% | -31.7% |
| CCI | 10% | 20% |
Horsa, at Orange, says that one of the main inefficiencies in the clearing and payments system in Romania is that settlement is next-day for payments in Leu of less that RON50,000. But Horsa adds: “This is better compared to two working days, which was the case two years ago.” Romania’s clearing systems are showing sure signs of improvement, although there is room for more. The obsolete paper-based clearing for cheques and promissory notes still needs to be urgently replaced with an electronic image-based clearing system.
Advances in technology are helping companies with large numbers of payments to automate the input of their accounts receivable and accounts payable systems and this reduces the number of errors and costs. It also enables companies to control the timing of their disbursements more effectively, ensuring that cash flow is optimised to increase working capital. For example, distribution is big business in Romania because the retail industry is less developed than in western European countries and large retailers rely on distribution through small local outlets. Distribution companies therefore collect from various locations and use many instruments. By automating collections with electronic payments, the company can standardise its accounts receivable, receive all the money into its master account and speed up the collection process. The utility providers and the telecom companies are also pushing automation of the reconciliation process in Romania by implementing common standards and introducing common IT infrastructure.
Another aspect of the payments industry in Romania is the mandatory requirement for special paper-based reporting, mainly for statistical reasons, for cross-border payments. This creates additional work and cost for both clients and banks. International banks are promoting electronic reporting and we expect a decrease of paper documentation in the following years.
The RON’s full convertibility has improved the ability of corporates to pool cash and make payments. The currency was redenominated in July 2005 and the old value of 1,000,000 lei was replaced with RON100. According to Orange’s Horsa, this has simplified operations. Companies can reduce the number of foreign exchange transactions needed by investing in local money markets, rather than foreign currency instruments. The RON exchange rate is volatile but this means that the local markets can potentially offer higher returns at greater risk. In addition, the companies with cross-border business can increase the degree of natural hedging by reducing the risks and costs attached.
Physical cash pooling in Romania is expensive for both clients and banks because of the logistical costs and interest loss. However, the growing volume of physical cash pooling provides the opportunity for corporates to benefit from economies of scale, while more accurate cash flow forecasting allows more efficient cash management in the first place. International banks advise clients to reduce the number of bank transfers in line with the local complicated legal environment. Netting is allowed only in very limited cases. Much of the paper work involved can be partially avoided if the right company structure is implemented. According to Horsa, the main cash management issues for Orange in Romania are as follow:
State Treasury is the name of the state-owned authority in Romania, which collects all payments to state-owned companies or companies supplying goods or services to state-owned institutions. State-owned institutions conduct a lot of business with the public sector in Romania. State Treasury has a monopoly in this market and is well know for its inefficiency. Funds received into State Treasury accounts cannot be effectively managed unless they are transferred to commercial banks. Leading international banks have developed an automated interface with it in order to manage the accounts opened with State Treasury electronically.
The most important way to enhance yield and also to ensure accessibility to cash at all times is to predict accurate cash inflows and outflows. A short-term view can be very inefficient in the long-term. The corporate treasurers should also consider how collection patterns could be improved in order to eliminate shortages and inefficient peaks.According to Horsa at Orange, the best way of enhancing yield, while ensuring access to cash at all times is through short term simple deposits in RON and euro. Other ways in which companies can optimise liquidity in Romania include savings accounts, notional or physical pooling.
The banking sector in Romania is relatively young and dynamic compared to other western European countries. For that reason the implementation of new initiatives such as the Payment Services Directive (PSD) or the single euro payment area (SEPA) should be achieved in a relatively short period of time, with benefits for the market. “Orange Romania’s payments and cash management will not be affected by SEPA or the PSD as we are already using IBANs and SWIFT codes when we instruct payments, either local or abroad,” says Horsa.Corporate treasurers in Romania are keen to adopt single European market standards and solutions, so this client demand is also driving the Romanian banking market to harmonise with the EU as quickly as possible. The main priority for Romanian cash management banks in the next three years will be achieving true straight-through processing – it will also be one of the most difficult challenges.