Is CEE the Next Hotspot for European Shared Service Centres?
The Polish prime minister, Donald Tuck, recently declared that Poland will, as soon as possible, carry out the economic reforms necessary to join the euro. Although there is widespread belief that Poland will enter the euro by 2012 or later, on the Polish television channel, TVN24, the prime minister predicted the readiness of the country for entry into the eurozone by 2011. Furthermore, on 1 January 2009 Slovakia will have entered the eurozone.
With the introduction of the single euro payments area (SEPA) on the horizon and thanks to the continuous growth of the central and eastern European (CEE) region exceeding that of many western economies, this region has become a new core market for many multinational companies both as a consumer market and sourcing location. Setting up a shared service centre (SSC) in CEE is also becoming a more popular idea, but there are barriers that can make this hard to achieve.
Despite the harmonisation efforts, different regulatory and legal frameworks in each country exist. In Poland, stamp duty regulations apply to cash pooling transactions where participating accounts are held by different legal entities. Nevertheless, some banks familiar with the regulatory framework in the region have introduced cash pooling techniques that take into account Polish regulations and even realise cross-border target balancing with CEE and western European accounts.
The slow take-up of SEPA is a European-wide phenomenon and there are several reasons for this:
The lack of the euro as a national currency in the CEE region weakens the opportunity to benefit from the efficiencies that SEPA could bring and that are sought in the existing eurozone countries. This will further slow down the introduction of SEPA in this region and will extend the usage of local formats instead of (internationally-oriented) SEPA formats.
Of course, this will protect, to some extent, the local CEE banking market against international competition on payment services but, more importantly, it is hampering their ability to become the new hotspot for SSCs in Europe.
But change is under way with the introduction of the euro in Slovakia on 1 January 2009. The changeover has been a huge project for the banking community. For example, CSOB Slovakia is currently in the final stages of its integral testing, whereby we run through every possible scenario and see how the new euro systems will interact with each other. We started preparations over 18 months ago to ensure a smooth transition. KBC in western Europe has experience of euro migration, which will be useful knowledge going forward.
Hopes are that, with the euro accession, Slovakia will become a gateway for western European or oversees companies who want to establish a SSC in CEE. Slovakia is an attractive proposition, with a skilled labour market, relatively low wages, an open economy, the SEPA compliant payment market, and historic and economic links with its big brother, the Czech Republic.
On the corporate and cash management side, the local SKK clearing will become euro clearing and all banks will be required to connect to TARGET2. At the moment, same day value SKK payments cannot be made after 11am. With euro adoption, it will be possible to make same day value payments to any other Slovak bank until late afternoon. This will be a significant advantage for corporate clients.
Of course, the profit of FX transactions between SKK and the euro will end, but the attraction of SSCs, with their more advanced needs, will move demand from simple hedging products to more complex structures or commodity related products.
Although in the (very) long term, SEPA could lead to centralisation of accounts on an European level, it is clear that neither the regulatory framework neither the corporate customers or their end-customers are ready for that kind of change. Furthermore, the recent storm within the banking community made corporate customers aware of the credit risk of their banking counterparts and convinced banks that credit lines should also entail ancillary business from their customers. These are drivers for companies to remain or even build up their number of banking relationships. Nonetheless, SEPA, and maybe even to a larger extend the credit crunch, has put the centralisation of liquidity high on the agenda of every corporate customer.
Domestic notional pooling and zero-balancing techniques has become widespread in CEE. Since cash has become king again, the demand for zero-balancing, effectively centralising liquidity on the master account is most popular.
A typical CEE feature is the multi-level funds consolidation with reverse sweeping the next day. By reversing the credit or debit balance daily, the actual position of the participating account with regards to the master account is shown. This is an effective way to inform the daughter company and help create a sense of responsibility about their position, and steer accounts payable and receivable management.
Furthermore, cash pooling across CEE countries is increasingly sought after and is provided by only a handful of specialised banks. Cross-border cash pools with participants in several CEE countries are rapidly becoming the new standard.
In addition to optimising liquidity, however, SSCs are seeking a global approach to managing the their CEE financial supply chain, from purchasing and sales, through payments and collections, in order to reach economies of scale and create lean organisations. Of course, CEE has an efficient and effective local payment systems in place already.
In Poland, mass incoming payment reconciliation systems are widely used and approximately 50 million transactions are processed by banks’ systems each month. Since 2004, Poland has implemented the IBAN account number standard and the same rules apply for local settlements, excluding the country code. Everyone therefore operates locally using 26 digit account numbers. Another example is the Hungarian direct debit system, which provides a lot of very specific status reporting for the creditor and is embedded in a strong legal frame.
Although SSCs work with these highly performing local payments systems, CFOs and treasurers need to have a regional overview of their accounts and need a central tool to manage their payments and collections. In the advent of SEPA, SWIFT connectivity models for corporates, such as the MA-CUG and SCORE, will play a role here. Some banks that cover the region have a single solution in place covering the electronic banking needs in several central European countries. They support several CEE payment and direct debit formats and entry screens and are positioned as the central gate way for accounts receivable and payable management. As such, they can provide added value to companies with operations in various CEE locations or SSC’s active in the region.
The different countries in CEE are today characterised by consistent and enduring economic growth and have effective and efficient payments systems in place. The performing local payment systems and the rise of cash pooling techniques in the region further underpin this competitive advantage. But the lack of the euro has slowed down the introduction of SEPA and has served to temporarily undermine the attractiveness of the region for SSCs.
The advent of the euro will boost the effect of SEPA in the region and the attraction of western European and oversees companies in the search for a new economically ‘interesting’ location for their SSC. Keen liquidity management and a consistent approach to supply chain management are key components in the success of all companies. Working with an experienced banking partner with strong involvement in the region will also lead to a successful business strategy.