Cash & Liquidity ManagementCash ManagementNetting/PoolingWhose Money is it Anyway?

Whose Money is it Anyway?

Worldwide, active management of three things gives corporations their edge: stock, people and cash. Stock we learned about from Deming, the US consultant widely credited with improving production in the US during World War II, and the Japanese. People now often live on the other side of the world from their employer or key clients and we’re adjusting. But cash is another story – with cash we are still hemmed in with restrictions from regulators. We can lobby them but it’s a long game.

Banks also restrict us when it comes to cash. It’s time corporates demanded more from their banks. Increasingly, more banks are offering intelligent cash management solutions after years of reluctance. Why? Because technology now allows them to do it better – and at an affordable cost.

It’s not easy being a multinational corporation these days. There was a time when life was pretty simple: buy something, do something to it and sell it on. As long as the cost of the ‘doing’ wasn’t more than the difference between its cost and price, then it was money in the bank and job done. Now it’s a bit different and life is more complicated. The huge growth of environmental concerns, compliance and fraud are just a few examples. But ultimately, business advantage is derived from three areas: stock, people and cash. We spent the last half of the last century learning that stock or inventory is bad. Just-in-time, lean manufacturing, six sigma…the consultants made money and it shook up lots of firms, but it did mean more efficiency and lower prices on tighter margins, so more opportunities for the smart ones to compete.

Currently, we are still in the middle of a people revolution. As economies continue to liberalise and leapfrog, the balance of power is shifting to the high growth economies, like the Middle East, and the eastward shift of wealth will continue to challenge the west’s assumed right to dominate. Now even the smallest western company will look to source goods and manufacturing from the east. The new rechargeable battery for my camera, sourced on eBay, was cheaper and arrived quicker from Hong Kong than if I had sourced it from the UK. And in this new world, the free movement of goods is recognised by countries as critical to success.

What Happens When We Look at Cash?

Cash should be just like stock. Cash sitting somewhere and not being used costs money. Just like stock sitting somewhere, not being used. We know this because the terminology has changed – suddenly everyone is talking about the ‘financial supply chain’. Only with cash, it’s worse. Unlike stock, if I can get cash in the right place, I can make more money off the back of the cash I do have without using it up.

The problem is that, in the world of finance, everyone else suddenly thinks it’s their money. You can’t move money between subsidiaries of a multinational corporation (except by invoice, dividend or loan). If you’re a Japanese firm, you can’t lend money to a firm in the Philippines. You can’t pool money across many borders, for instance notional pooling in France. You can’t get credit interest on balances of corporate cash accounts in the US or Switzerland. You can’t move cash out of certain countries at all. In certain countries, you and your bank can’t negotiate freely what interest rate to be charged. Even Basel II has made banks think twice about notional pooling because of the additional costs it incurs.

More harmonised import and export regulations, computer-aided design standards and shipping container standards were some of the seismic changes that mainly freed stock up from a mass of diverse international regulations. Processes became more standardised. It’s happening in finance, but in isolated places: payments, for example, are in the forefront and – the classic piece of evidence – nobody makes much margin on payments anymore. Cash management is probably where payments were a decade ago.

It’s Not Just About Regulation

There have always been barriers against the international movement of money. Compliance with both local and international regulations will always be a factor, but there are also internal cultural and motivational barriers for both corporations and banks. Especially where, as is often the case, centralisation is involved.

Banks in particular have put up barriers, making it very difficult to pool cash to maximise value. Historically, they have been reluctant to offer these services because it might mean dealing with other banks, but also because it’s costly and because notional pooling just seems like cutting prices. And, ultimately, banks have found real, proper cash management – which means sweeping, topping and notional pooling across countries, currencies, time zones and banks, with correct handling of inter-company loans, interest bonus calculations and distribution, apportionment of capital adequacy, monetary reserve and funding costs – just a little bit too hard, except maybe for the largest ones.

Despite the regulatory and other obstacles, multinational corporations can make their cash work for them more effectively now than ever before, across their entire global business. All it needs is for more banks to start offering the services only a few of them offer today. For that to happen, though, corporates need to start demanding more from their bankers rather than having to invest more and more of their own money to provide, internally, services their banks should be able to give them.

Corporations can often already manage cash effectively domestically. For instance, a typical corporation with multiple subsidiaries in a single Middle Eastern country will likely already be pooling each one’s funds to improve liquidity, to have better purchasing power and to offset negative balances with the more successful businesses in that country. It is also commonplace between countries in a similar financial region, like some parts of the Middle East or within the eurozone in Europe – though usually all in one currency. The tide is turning as more banks are getting in on the act. And corporations are beginning to demand effective cash management more.

What Has Changed?

Demand, supply and technology are drivers for more effective cash management. With the global economic climate putting more pressure on organisations to drive margins up and increase revenues, cash is even more valuable than before. Corporations are finding it more difficult to borrow and are seeing their credit ratings reduced by a renewed focus on how they are using their cash. This pushes multinational corporations’ demand for banks to provide more effective cash management services, in particular in the area of global cash pooling.

From a supply point of view, banks are forever trying to increase the share of the customer’s wallet. With margins becoming ever tighter in payments, they are looking to other areas within their business to increase the amount they can make from their customers. Moreover, non-capital intensive activities are suddenly looking a whole lot more attractive to banks. Global cash pooling is an area that few banks have capitalised on until now, since the available information has been limited around the location of the money across the world at any one time. This sea change – of the increasing corporate demand and the banks’ need to offer global pooling capabilities as a valuable service to stay ahead of the competition – has shifted the industry. Critically, the underlying technology has moved on, enabling new thinking despite the paucity of standards.

There are two main ingredients to the technology story. At the front-end, an intelligent delivery mechanism provides the information required across multiple banks and multiple bank accounts to the treasurer’s desk, in the format needed. Consequently, corporations get better visibility and control to make the most of their funds worldwide. Among the many services it offers are intra-bank and inter-bank fund transfers, bulk uploads, control of sweeping, topping and notional pooling services, account balances and a robust audit trail – all intra-day, of course. For banks, it increases customer loyalty and profitability, although at first sight it may look like purely a cost.

In the background, a powerful processing engine for banks that combines real-time information about cash held in multiple accounts across many countries and time zones, managed by different systems and held in a variety of currencies.

Winners on Both Sides

The result is that the technology provides banks with automation so they can handle the complexities the regulators throw at us all and still deliver services at a low cost. All the clever circumventions corporations have created (often involving an oppressive number of manual downloads) become less necessary. These new, intelligent global cash pooling solutions are driving efficiencies for both the bank and the multinational corporation, gaining a greater share of customers’ wallets for banks at the same time as increasing margins and allowing corporations at last to reap the permitted rewards of pooling cash on an international basis.

Corporates must keep demanding more from their bankers in order to find the path to a truly global cash pool far easier to tread.

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