Latest Techniques for Pan-European Cash and Liquidity Management
When we look at the European payments landscape, we must acknowledge the fact that the introduction of the single euro payments area (SEPA) will create a fundamental transformation of pan-European cash and liquidity management techniques. Today, there are 27 countries in the European Union (EU) including 15 euro countries, 12 non-euro countries and the four European Free Trade Association (EFTA) countries (Iceland, Liechtenstein, Norway and Switzerland). As a result of SEPA, we will move from a situation where there are 35 different settlement systems, multiple formats across Europe, as well as diverse legal structures and cultural habits, to one harmonised and standardised payments landscape.
But what does SEPA really mean for your business as a corporate? This initiative will be a key accelerator in reducing the number of accounts you need to hold through the use of in-house banks and pan-European accounts, as well as ensure interoperability through open formats and connectivity. In particular, SEPA offers multinationals the opportunity to centralise payment and collection initiation by establishing shared service centres or payment factories, as well as reduce the number of bank relationships as consolidation of the banking industry creates truly pan-European banks.
SEPA will act as a catalyst to develop harmonised solutions across Europe in the following ways:
1. The EU opted for three SEPA means of payments:
2. SEPA will promote homogenous means of payments across the eurozone and reduce cross-border charges.
3. It will be based on one common standard (ISO UNIFI 20022 XML), which will facilitate end-to-end automation and facilitate payment reconciliation data.
4. SEPA will lead to the introduction of additional optional services (AOS), such as electronic reconciliation, electronic invoicing (e-invoicing), improved straight-through processing (STP), cost reductions, better cash flow forecasting and compliance.
5. SEPA will also lead to the development of new solutions such as electronic bank account management (EBAM) standardisation, i.e. one public standard for interoperability and dematerialisation of the account management process as developed by SWIFT.
SEPA also provides the potential to transform the value chain and achieve true end-to-end STP ultimately enabling corporates to get their money as soon as possible. The initiative will allow companies to optimise their working capital processes, such as faster payment collection due to new payment instruments and increase the speed of funds along the supply chain. It will certainly give corporates the opportunity to introduce innovative working capital finance solutions.
While SEPA undoubtedly presents numerous opportunities, it is also worth keeping in mind the outstanding issues that still need to be addressed by the industry in order for SEPA to achieve its true potential. Most importantly, an end date by which the SEPA instruments and infrastructure will replace existing domestic systems and instruments must be set. Without this commitment it will be much harder for corporates to prioritise migration and for banks in turn to promote the benefits of SEPA to corporates.
It is also worth pointing out that while the Payments Services Directive (PSD) is vital to the success of SEPA, it is not just about SEPA. The PSD is one more brick in the pan-European structure that the financial community is building. Significantly, it will create the rules and legal framework to make the EU a single market where all systems and instruments are harmonised and a unified trade market exists.
When we look at the European landscape, Hungary and Poland are two key and attractive markets that should be taken into consideration when implementing a pan-European liquidity management structure. Both of these countries attract a large amount of foreign direct investment (FDI) and have useful economic dynamics, such as a tax friendly environment and low-cost educated workforce. The services currently available in Hungary and Poland include:
Both Hungary and Poland have embraced new technologies and have a regulatory environment that enables the set-up of the latest cash management techniques and structures. For example, Hungary and Poland are the largest users of the euro credit transfer zone, which means that the SCT will see widespread adoption in these countries. This is also true for purchasing cards and the use of fully integrated multi-bank cash management solutions. Looking further ahead, there are also significant opportunities around the SDD, which will be launched In November 2009, and the new SEPA pan-European standards for billing, EBAM standardisation and other business transactions.
By taking advantage of emerging opportunities in Hungary and Poland, corporates will be able to generate cost efficiencies, improve their operational efficiency and reduce risk.
“Managing pan-European liquidity is a challenge for any global organisation,” affirms Patrick Villers, managing director, global business services, corporate treasury at General Electric (GE). “And GE is no exception.” The company is a truly global organisation with 142 relationship banks in 66 countries, 400 treasury professionals around the global and 66 pooling structures. In the combined region of Europe and the Middle East (EME), GE has 34 bank partners in 36 countries with 32 pooling structures in 19 countries at 15 banks.
GE started its journey to improve its pan-European liquidity structures in the early 90’s. Until then, the company had relationships with multiple cash management banks and no connectivity with its banks to obtain balance reporting or make funds transfers. Between 1995 and 2005, the company reduced the number of cash management bank partners and selected one or two local banks, which had the local expertise to support its businesses. It also built its own global infrastructure (initially Gateway and then Web Cash) using Edifact and subsequently adopted the SWIFT MA-CUG and SCORE models. Since 2005, GE has re-considered the number of banks it has per country in order to benefit from the latest cash management techniques and technologies.
“We are driven by our need for real-time access to data and the ability to consolidate cash in real time using cash pools,” explains Villers. “New technologies make it possible to access multiple banks and countries from one platform in real time.”
GE’s central philosophy is that all cash belongs to the company and, where possible, all cash should be part of a cash pool. Cash that doesn’t sit in a cash pool is managed by treasury and the company has 39 pooling structures administered in real-time from the GE regional treasury centre in Gurgaon, India. For its European subsidiaries, the company also has a cross-border non-local currency cash pool with four US dollar cash pools centralised in Paris. “For businesses operating in Europe with European customers and suppliers, the accounting of US dollar receivables and payables is faster if accounts are held outside the US, as the payment cycle is not dependent on US clearing,” says Villers.
He also points to the following benefits in having the US dollar cash pools centralised in Paris:
“There are some disadvantages with this set-up though,” he admits. “There is an earlier cut-off time and no settlement after European hours. In addition, there are less options for offshore investment and less favourable rates if invested outside of GE.”
Another vital focus point for GE is improving visibility into the company’s balance reporting. “We have more than 12,400 accounts reporting today and our goal is to reach 100% reporting on all accounts with GE’s partner banks and as many as feasible and economical at other banks,” says Villers. In addition the company is live with 95 banks on SWIFT MT940 for next-day balance reporting and 42 banks on SWIFT MT942 for intra-day balance reporting. It has one hub to collect MT940s for non- core banks and it is also live with BAI2 for US banks for next day and intra-day balance reporting. In addition, it recently started receipt of BAI2 via SWIFT FileAct.
GE pursues rigorous forecasting capabilities through its user-friendly web interface that allows businesses to enter cash forecast capturing including operating receipts/disbursements, FX/derivative flows and re-structuring flows. “Cash flows are forecasted in the forecast system at least a day in advance and there is auto-consolidation of forecasted numbers at a cash pool level,” explains Villers. “Cash flows in 2000 business accounts are taken into consideration for fund planning in Europe and we have a strict routine to investigate significant deviations from the forecast provided.”
The company is also a proponent of corporate access to SWIFT and Villers says that GE’s overall SWIFT strategy is based on the principle of simplicity with global reach through one connection, communication protocol, security protocol and message format standard. The company is live with 64 banks via a MA-CUG or SCORE model for SWIFT FIN funds transfer messaging and has 10 active projects on SWIFT FIN for central Europe. It is also live with 14 banks via SWIFT FileAct for non-urgent bulk file payments (paymul and ACH) and has a global cash management platform, GE Web Cash, in place that manages more than 6000 funds transfers per day, balance reporting, reconciliation and cash positioning, messaging middleware from Volante and SWIFT nodes in Stamford, CT and Alpharetta, GA (US).
“Where it isn’t possible to consolidate cash in real time or have overnight pooling solutions, we use overnight investment products,” explains Villers. “There are certain cases where we do have excess trapped cash with certain entities and cash pooling is not feasible due to regulatory or other reasons.” Furthermore, the company achieves interest optimisation by placing funds overnight on an automated basis and negotiated interest conditions based on market benchmarks.
The increasing automation of daily treasury operations is enabling corporate treasurers to take a more strategic role within the company. The treasurer’s role now encompasses group-wide business solutions; working capital, risk management, productivity and liquidity management; involvement in dispute resolution; a collaborative role with the CFO; and a leading and more visible role as a key decision maker in regional and global activities.
This is particularly important against the backdrop of the credit crunch, as the priorities in terms of liquidity management have changed in the last few months. For example, guaranteeing the availability of funds and that those funds are used to their maximum potential have asserted themselves as the priority for all corporates right now.
For Villers at GE, there are numerous priorities and opportunities in improving liquidity management in different areas and functions across the business. In eastern Europe and Russia, for example, prioritising projects within a regulatory framework is vital as well as considering the company’s investment policy. “It is important to include all stakeholders (i.e. tax, legal and compliance) and partner banks early during the structuring process,” he says.
He also points to the fact that the company started to implement a multi-bank cash pool with bank partners in 2008, which has generated a range of benefits, including cash concentration with the bank with the best interest condition, efficient pool management leading to reduced interest costs and a reduction in manual wires.
A company’s SEPA strategy game plan is also an important project to consider right now in terms of pan-European liquidity management, according to Villers. “A SEPA review must be consistent with other internal strategic initiatives, such as centralisation, automation and standardisation through SWIFT and XML,” he says. “There is no right and wrong blueprint but it helps to use a structured approach to evaluate what is best for your business.”
In terms of connectivity and standardisation, Villers highlights the migration to ISO 20022 XML messaging formats in areas, such as payment instructions, cash reporting, exceptions and investigations, bank fees and bank account mandates. “Standardised formats with input from banking and corporate communities is a focal point for us right now,” he says.
The pan-European payments landscape is evolving rapidly with the introduction of SEPA. Couple this with the ongoing impact of the credit crisis, corporates face numerous challenges in ensuring that they manage their pan-European liquidity and cash management in the most effective way. In addition, the focus on driving further working capital efficiencies has never been as important. There are plenty of opportunities for improvement, though, and corporates should look to take advantage of the tools and techniques that are available today.
“The way to survive in today’s climate is to be proactive and move quickly,” affirms GE’s Villers. “Due to the credit crunch, all corporates need to get back to basics in terms of pan-European liquidity management.”