Thoughts for a successful and well-functioning Asian treasury operation
Solenn Le Lay and Hélène Shen, consultants from Redbridge DTA, identify important areas that treasurers should consider to avoid the common pitfalls of doing business with banks in Asia: obtain optimal pricing and ensure top quality services for all their local cash management needs.
Treasurers typically do not consider the banking costs of their cash management operations in Asia to be sufficiently material, particularly relative to other regions of the world. Local treasury operations in Asia pay an average of 0.003% to 0.004% of revenue for collection and disbursement services – amounts that are 10x less than those in the West.
However, these costs deserve to be scrutinized as there could be real opportunity for these costs to be cut by 2/3rd with a well-timed and well-executed RFP. Indeed, services such as currency hedging, guarantees, trade financing, and overdrafts are costly services that can often be negotiated for more competitive terms, but many account costs are often overlooked, and often must be thoroughly and objectively challenged.
To successfully create a highly cost effective Asian cash management operation, treasurers must focus on a few key areas. Most importantly, they must select only optimally suited banks to include in RFPs. Within companies, there is often a disconnect between the local and global treasury teams as to which banks to invite to participate. Local treasury teams typically value local banks that possess familiarity with the nuances of country-specific banking operations whereas global treasury teams often favor international banks with global capabilities. The most strategic choice is often to include both in the process so that all stakeholders can choose the most appropriate service providers.
In the process, it is essential that management carefully scrutinize each bank’s expertise and quality of service, recognizing that banks might exaggerate their capabilities and may be engaging independent third parties to provide critical services on behalf of the bank. In cases in which major international banks have clearly invested in developing their operations in this region, treasurers must also determine whether the bank’s experience is sufficient to provide the desired level of service and efficiency. This is particularly critical for complex operations such as cross-border cash pooling in China. Few banking institutions possess this expertise and will often offer noticably low competitive pricing just to attract clients to build their experience.
Another common challenge in assessing responses to an RFP for cash management services in Asia relates to incoming and outgoing cash flows of subsidiaries. Since the most commonly used methods of payment differ significantly from those employed in the western hemisphere, treasurers must become familiar with local business customs for each of its subsidiaries in the region. For example, promissory notes, often called bank acceptance drafts, are physically traded (hand-to-hand). Aside from being a relatively expensive means of transacting business, this alternative form of payment is difficult to trace, creating additional challenges with risk management. Treasurers must also regularly deal with the lack of bank transparency when overdraft and deposit rates are set. The deposit rate, for example, is not linked to a market reference rate but rather to non-transparent and seemingly subjective internal bank processes.
Ultimately, selecting a cash management service provider requires a careful analysis of both a bank’s true capabilities in providing services and whether there is a long-term commercial committment to the region. In recent years, there have been some well-documented cases in which corporations were given very short notice of a bank’s decision to withdraw from the region, forcing treasurers to quickly select and establish their banking with a new cash management service provider, sometimes not benefiting from the optimal results of issuing an RFP.