Cash Management and Payments Challenges in CEE
There are several challenges in terms of payments and cash management in CEE. The demand for shared service centres (SCCs) is growing and, as companies integrate CEE into their SSCs, they need an increasingly regional approach that encompasses CEE as well as western Europe and future EU accession countries.
Market practices are slightly different in each country, which can make collections difficult. Cash handling is also challenging for corporations and banks in each country. The main challenge for banks in terms of collecting and processing customer’s cash payments is developing a network and many banks choose to partner with local institutions. Cash is still a predominant consumer payment method in some countries and the cost of moving, storing and securing cash is high.
It is not feasible to have one approach for all countries when it comes to receivables due to the different jurisdictions in each country, however, corporates want one bank for their regional reporting, which is a challenge. Some countries, for example the Czech Republic, have electronic payment systems, such as direct debit or payment cards, so most of the receivables are also electronic. Other countries, such as Poland, Bulgaria, Romania and Hungary, have more cash-based economies, which require different products to ensure that payments are more efficient.
According to Daniel Stancu, Citi’s head of cash management in Romania, consumer-to-business (C2B) cash payments remain very popular in Romania, which means banks have to find innovative ways to address corporate needs in terms of an efficient, fast and cheap solution for collecting individual cash payments.
On the whole, cheques (both corporate and consumer) are not common in CEE, compared to western Europe. They are almost non-existent in the Czech Republic and Slovakia; and Romania is the main cheque user.
The Czech Republic and Slovakia introduced their electronic payment systems in 1992 and 1993, respectively. They are operated by the national banks and they are used for both small and large domestic payments in the inter-bank market. These systems have a specific communication platform that has been developed by the national banks and are not likely to use SWIFT in future. When the euro is adopted, they are likely to use Target 2
predominantly.
The Romanian electronic payment system was introduced in early 2005, so it is still new and very efficient, introducing lower costs for corporates. The system is split into one system for low-value payments and one for high-value operated through SWIFT. Another part of the system will be introduced in April 2008 and will electronically process cheques and promissory notes.
Because CEE countries overall introduced their payment systems later than western European countries, they tend to be more efficient because they were able to bypass the old-fashioned IT systems of the 1980s. The Czech Republic and Slovakia have opted for one system for low and high value payments, and everything is settled on the same day. This system is quite progressive and they have express payments and standard payments.
Filip Zahorik, Citi’s global transaction services head for Slovakia, says that Slovakia’s payments environment is less electronic than that of the Czech Republic, with payments often made in cash. Utility and insurance companies in Slovakia are using innovative methods and are putting in place efficient cash collection products.
In Bulgaria, Hungary and Romania there is a distinction between low value and urgent payments, as in most western European countries. In Hungary, there is a giro system, which is the equivalent of the UK’s current practice. The table below shows what is available in terms of clearing and payment in each of the six CEE countries considered in this article.
One challenge is offering corporates a fully netted liquidity structure. Karin Flinspach, head of cash management for CEE at Citi, says: “Customers would like to have perfect offset of all of their balances across all of their accounts, cross-border in all countries.”
However, from a bank perspective, although money is fully transferable between countries, if credit and debit balances can’t be netted on the balance sheet of the bank, then it is not possible to offer the full benefit to the customer.
Regulations vary across Europe so it is difficult to offer standardised cross-border products, although regulatory differences are diminishing gradually. Romania’s currency, the Romanian new leu (RON) was introduced in 2005 and few FX regulations remain. Each cross-border transaction, whether it’s a payment or a receivable, has to be reported by the corporate customer through its relationship bank to the Romanian central bank.
In the Czech Republic and Slovakia, the full convertibility of currencies was established in 1995, although there were still some reporting duties, most of which were revoked in 1998. Currently in the two countries, some central bank reporting is needed in relation to certain long-term investments.
In Romania and Bulgaria, FX deregulation occurred quite recently and full convertibility was achieved in 2006. However, the main obstacle in implementation of liquidity solutions is not FX regulation, but tax and fiscal issues that have been negotiated individually by each bank with the regulators, authorities and the central bank. This is because there was previously no established framework for conducting such transactions.
Pooling structures have recently been introduced in Romania and Bulgaria and they are covering new ground. Big banks can now offer pooling and cross-border structures in every European country, although in some countries, such as Poland and Romania, there are challenges such as taxation. Banks need to be innovative in order to overcome such obstacles. Poland has some fiscal obstacles but the treatment and taxation of inter-company-lending are the main ones. Fiscal issues in Romania are also mainly related to inter-company loans.
It is possible to set up sweeping structures in all European countries because, in principle, money flows are not regulated anymore. However, sweeping can have an effect on the inter-company lending structures, reporting, tracking of the inter-company loans and accounting and tax issues arising out of it. These are issues that companies need to address, but if their internal structures are set up in the right way, then sweeping is possible.
Having a notional cash pooling structure is possible and is also an increasingly important cash management tool for corporates in CEE, in light of some of the regulatory obstacles to physical cash pooling. In Romania, local institutions cannot participate in a cross-border notional pool.
Differing regulations and payment environments across CEE make it difficult for corporates to have one approach to payments and cash management for the whole region. Many of the CEE countries still use cash as a predominant consumer payment method, but electronic payments now have very efficient clearing systems and the payments environment is set to become increasingly standardised as Poland, Slovakia, the Czech Republic, Hungary, Bulgaria and Romania all travel down the route towards European payments harmonisation and the single euro payments area (SEPA). Cash management remains a challenge for corporates in the region because physical cash pooling often incurs inter-company lending tax. Corporates are therefore increasingly looking towards notional pooling as a way of optimising their cash liquidity in CEE. They are also viewing SSCs as an attractive way of optimising their payments and cash management in the region. For more information on SSCs in CEE, read: What Now? What Next? – Part 6: Shared Service Centres in Central and Eastern Europe.