Netting is relied on by corporates in a multitude of sectors from technology to entertainment and some of its biggest users include large international firms like Fujitsu, BASF, Diebold Nixdorf and Motorola.
Uygar Gazioglu, senior vice president and group treasurer at Motorola Solutions, points out that one of the main benefits of intercompany netting is that it enables subsidiaries in a group to make payments to, and receive payment from, each other via a centralised netting centre, thereby reducing the number of transactions involved.
“We have 150 subsidiaries, and they can be making large numbers of payments for certain amounts to each other at any point in time,” Gazioglu says. “These can be net out through the netting system so that every entity just ends up paying the net amount due.
“This reduces the number of wire transfers required and less wires means less fees. We estimate that the number of wire transfers required can be reduced by between one-fifth and one quarter using netting.”
Another core benefit of netting is the ability to net out the foreign currency requirements of individual subsidiaries.
“Without a netting structure, one subsidiary might need to go to a bank and buy euros to make a payment and another subsidiary in the same group, based in Europe, may need to sell euros to make a payment in another currency, and such transactions cost money,” he says.
“Netting enables the exchange of currencies required in the centre without having to go to a bank. Of course, subsidiaries’ needs for currencies never match perfectly, but once the currencies required by them are netted out, Motorola only has to buy the residual amount of currency it needs in one trade.”
Such one-off large trades in a particular currency also ensure a better price for Motorola than multiple, smaller currency trades individual entities would have to make without a netting system in place.
“It also means that subsidiaries do not have to do all this work themselves,” he says.
Third-party vs in-house
Motorola, which has been using its current, modern netting structure for about a decade, relies on a third-party software solution and this, says Gazioglu, represents a massive step forward on the in-house netting systems that were widely used about 20 years ago.
“In the early years, subsidiaries using in-house systems relied on emails to advise the netting centre on their needs, and this created control and risk issues,” he says. “This system was prone to mistakes and also needed larger staff resources to keep track of needs.”
Nevertheless, in-house systems can continue to represent a simple solution that is viable for smaller companies with lower netting requirements – particularly if they do not net payables and receivables very often, says Gazioglu.
“Some companies may only do netting once a month but at Motorola, we do it every week on Thursday – our netting day. Much depends on what you need to deliver.”
Gazioglu is also a firm supporter of cloud-delivered solutions, due to them offering scalability and ease of use.
“As a company, Motorola is very much focussed on merger and acquisition activity and having a cloud-based solution enables us to quickly and easily integrate new entities and to train new people in the use of our netting system,” he says. “Many years ago, companies relied on their own in-house systems and non-cloud software solutions but extending this type of netting solution across a large, growing organisation can become a massive IT exercise.
“Another big benefit of the cloud is that it is so much easier to train people in – they simply log into the web-based solution and just sign in to get going. During the Covid-19 pandemic, all the training required in our netting system was done online.”
Netting captures smaller corporates’ interest
Advances in technology and the availability of specialist third-party software have made netting structures both cost-effective to implement and easier to use, bringing it to the attention of a wider user base.
In a recent survey by software provider Coprocess, it found that of all the companies using netting, 60% have revenues of $18bn+, while 23% have turnover of $5bn+.
In fact, around 48% percent of larger corporates surveyed rely on netting structures in comparison to 39% of smaller firms with fewer subsidiaries.
Coprocess’ research notes that netting “represents another way of empowering corporate treasurers to do their jobs more effectively, more efficiently, and at a lower cost”.
However, despite the increased broader appeal of netting, and its accepted wide use across both North America and Europe, restrictions still apply in large economies such as China and India, according to a list published by Coprocess.
Restrictions are also a feature of many larger economies in South America including Brazil, Argentina, Columbia and Bolivia.
In ten countries worldwide where restrictions apply, netting requires central bank approval. Of the companies using netting, 56% were headquartered in North America, according to the Coprocess’ research.
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