Cash Management in South Korea
The gross small and medium enterprise (SME) market size in South Korea, based on demand deposit, is projected to reach US$22bn in 2009 and is increasing by 8% every year. Therefore, the competition in the country between banks to attract and acquire new corporate customers is heating up.
Although global banks have offered cash management services to their clients for quite some time, especially multinational corporates who have subsidiaries in South Korea, local banks have just recently entered the cash management market during the explosive growth stage in 2005 or 2006.
Since the second half of 2008, however, market growth has slowed down. Therefore, local and regional banks have had to change their concept of who their target audience is, as well as their marketing strategy, compared to the early stage of market development.
Banks in South Korea divide their target client into three groups: very large companies, including public enterprises; medium-sized companies; and small companies. Historically, they have had to develop different marketing strategies and product offerings for each target group (see Figure 1).
Many South Korean banks, which just recently began offering cash management services, initially focused their attention on medium-sized companies due to the banks’ lack of experience and poor cash management service quality, which meant they could not compete with the larger global banks. Among mid-sized companies, they targeted online shopping firms and transportation companies specifically because both sectors were under a lot of pressure to enhance inefficient cash payment and income processes.
Now these banks are trying to extend their services to include large companies and public enterprises because they have become aware of the profits that can be made from being the primary bank to larger clients. For these reasons, over the past few years many local banks have developed tailor-made cash management services, identified as an in-house banking service in this article.
In order to develop these services for a new client base, the local banks need to understand what a South Korean treasurer needs. A treasurer’s needs are sophisticated and complicated in terms of the speed and functionality. For speed, they want real-time cash collection and payment; in terms of functionality, they need a cash management system integrated with an enterprise resource planning (ERP) or accounting information system in order to make it possible to manage financial assets by themselves, instead of authorising their primary bank(s) to manage it for them.
One distinctive feature of South Korea is that companies show a strong loyalty towards their primary bank, which means that acquiring new customers can take a long time and much effort. However, this situation is changing as the trend of dependence on one bank is gradually weakening because treasurers are now looking to deal with many banks for efficiency and convenience.
Treasurers’ cash management needs are various and complicated, starting from simple accounts receivables (AR)/accounts payable (AP) management to idle money collection, overseas payments, remittance abroad and foreign currency pooling by combining with Internet banking, direct banking (exclusive transaction between bank and client) and SWIFT. Their concerns focus on cost retrenchment and internal control enhancement in the pressure from greater regional competition and the global financial crisis.
Since the onset of the financial crisis, public enterprises have an increased interest in risk management and cash forecasting. Additionally, because the South Korean government is planning legislation on implementing a special system related to risk management and cash forecasting in each public enterprise, local banks in the country are now heavily competing with each other for business in this area.
Currently, the local banks have already developed a number of cash management products, each looking to address their client’s needs for two to three years – a relatively short-term perspective.
The IT investment in cash management services is estimated at over US$4m per year, but as of last year, this huge investment has been scaled back due to a logical assessment of return on equity (ROE). Therefore, many local banks are changing their marketing strategy to focus on client maintenance and keeping their position in the marketplace. That means that today cash management products are modified according to each situation or customer needs, instead of developing new products that need a lot of investment, time or resources.
Due to a high level of IT investment across the marketplace for the past three years, the difference service quality between each local bank’s cash management products is very small.
Primary banks have gradually focused their interest on client cash volumes, not transaction fees, because of overheating in the cash market; presently, clients are getting all transaction activities, including online and offline, almost free of charge. Therefore, the transaction interest earned by banks providing cash management to their clients is declining. Additionally, since the Financial Investment Services and Capital Markets Act was enacted in April 2009, the possibility of an increase in the transaction fee is unlikely.
To overcome this difficult situation, banks that are providing cash management services to their clients have assigned them a relationsjip manager to try to earn the position of primary lender and depositor.
Generally cash product services include:
Customers are also looking for a suitable solution to enhance internal control and convenience, such as real-time subsidiaries accounts management, currency balance management or overseas payments.
As stated above, cash management products are developed by adding a few new services or modifying existing services, not by developing a completely new product. Under intense competition and forgoing huge IT investment, there is a narrow gap among these cash products in terms of service quality and performance. So a customer will choose their cash management product according to convenience or personal preference.
In order to be successful in this market, banks need to offer their customers a cash management product that connects its bank system with their client’s ERP system or internal legacy system.
Banks have traditionally aimed to get a return on investment within two to three years, but this situation is no longer viable because of the downturn in the global financial markets. Therefore, a South Korean bank’s marketing strategy has changed from trying to attract many customers by investing huge amounts of money, time and endeavour, to selecting a premium customer that has a good possibility of delivering a higher profit margin for the bank.
Currently, South Korean banks are working hard to segment customers by market type and set up a relationship manager with that customer. As the result of this work, major companies will have their needs satisfied by a global service which can control overseas subsidiaries and provide the convenience of foreign trade.
Additionally, many South Korean companies are expanding their global presences and need to be provided with global services beyond South Korea because local banks are not satisfying their customers’ needs. To overcome this global network weakness, banks operating locally are developing partnerships with global banks and designing new global cash management services.