Cash Management: New Trends Finance Should Know

In his 15 years with global bank Citi, Sandip Patil has worked in multiple markets across Asia, including India and Thailand. As the bank’s Managing Director and Region Head, Asia Pacific, Payables and Receivables, he has been assigned to Citi’s regional headquarters in Hong Kong for the past seven years.

 
“There is a lot that’s happening in the market, practically every year, and even more so in Asia,” he says. Among them: the evolution of shared service centres and inter-operable banking platforms, including a new corporate-to-banks service by SWIFT (Society for Worldwide Interbank Financial Telecommunication).
 
In Part 2 of a three-part interview session with CFO Innovation’s Cesar Bacani, Patil discussed these and other issues. Excerpts:
 
Is setting up a shared service centre (SSC) part of the service that Citi and other global banks can do for a company in Asia?
Adopting the SSC model to provide different parts of an organization with services from one or more central locations entails extremely complex organizational changes. You need internal buy-in from stakeholders on the business requirements. It also involves systems, operations, processes, regulatory compliance, organizational changes etc. All these are best managed by the corporate organization.
 
And an SSC doesn’t necessarily have to deal only with banking. When you’re establishing an SSC of the purchase-to-pay-cycle, banking is [only] one component of the entire gamut of activities. You’re going to suppliers, you’re looking at the kind of products they’re selling, establishing contracts, giving purchase orders, taking invoices and creating tables. These are relatively non-banking activities.
 
However, banks normally offer advisory services to assist clients in achieving their operational aspirations. We do this by sharing concepts and insights on process efficiencies, as well as identifying opportunities for clients to transform their process and optimize their cash conversion cycle. Banks do have insight into the processes of many of their clients and experience from operating their own shared-services centers.
 
In Citi, we have a consulting team which runs diagnostic questionnaires with clients to help them assess process efficiency/maturity and perform peer benchmarking, as well as gather latest industry trends, best practices and other relevant information for sharing with customers.
 
I asked because I know Citi was among the first to adopt shared-services structures for its internal operations and I imagine you would know a lot about what works and what does not.
We were the first one to create a shared service centre in the banking industry. There are a lot of centralisations we have done out there. It’s using technology as an enabler. We are the first users of emerging platforms for banking applications.
 
Citi created shared services centre-type concepts in India, in which we’re servicing the consumer side of the business as well as the corporate side of the business. This was in the 1990s and we ended up centralizing many of our consumer banking activities globally to our SSC in India. A lot of support services for credit cards and consumer banking units are supported out of our SSC in Chennai.
 
We created a separate legal entity and took it public. In 2008 it was sold to Tata Consultancy Services (TCS).
 
So your own cash management is being done by TCS e-Serve?
In India, predominantly yes. But we have SSCs for cash management and trade in Malaysia. In Penang, for example, [the SSC] does a lot of trade processing for us, like letters of credits, export document negotiations and bill discounting. This is an in-house SSC, serving only Citi countries and Citi businesses and branches.
 
The way SSCs are evolving, every SSC has to be more and more efficient day after day. Initially when people created SSCs, the value was sheer centralisation. Instead of doing 20 things in 20 places, I do 20 things in one place.
 
The best analogy I can give you is the food court. You have a Thai restaurant, an Indonesian restaurant, an Indian restaurant and a Chinese restaurant. You brought them under one roof to create efficiency.
 
After some time, you start wondering whether further efficiencies could be reaped. I’m cooking rice for Thai food, I’m cooking rice for Indonesian food and for Indian food, why can’t I prepare rice at one place and distribute it to my Thai, Indonesian and India shops? So you start standardising some of these processes.
 
A lot of SSCs which were the food-court variety model have now adopted standardised processes. They started questioning each and every process whether it is doing three-way match or relationship management or processing of invoices. There is a lot of standardisation that happened over the last 5 to 10 years.
 
The next thing that will happen will be around sophistication. If I have centralised everything, standardised whatever can be standardised, now can I make it even more sophisticated, can I use the latest technology tools to bring additional value, incremental value? So there are a lot of journeys we have seen in the last few years, mostly around using sophisticated technology.
 
What are these journeys?
One is the inter-operable platform. Let’s take a typical company. They have operations in 20 countries. They have, on an average, three legal entities in every country and so they have 60 legal entities in Asia. Each of them is banking with 3, 4 or 5 banks. They are handling literally 150 to 200 banks sitting in an SSC. Over time, you ask: Why do I have so many banks? Do I really need 200 in 20 countries?
 
So you start rationalizing. You maybe cannot do that in one go. Over a period of time you can go down from 200 to 100 and then to 50. As you start consolidating banks, your technology interfaces are also changing. Because you’re integrated with Bank A in a manner of A, with bank B in a manner of B, with Bank C in a manner of C, the interface operation and maintenance are fragmented, resulting in a lot of hidden costs and support costs.
 
Does the banking cooperative SWIFT, which can now link a corporate with its thousands of member financial institutions through its SWIFTNet solution, help with this?
Exactly. One of the paths that we are seeing in the evolution [of cash management] is SWIFT, because SWIFT as an inter-operable platform plays a big role. This is prevalent in the European market, but you are also seeing the change in Asia.
 
We have catalysed that change. We [at Citi] leveraged the SWIFT format and customised it to the way India operates or China operates.
 
Citi is changing the SWIFT architecture?
We’re not changing the SWIFT architecture. We’re changing the way it links to the banking system [in different Asian markets].
 
For example, MT940 has been in existence for 20 years. It is the most widely used bank statement format, but we realised that MT940 is very fragmented and the codes that people are using within [the format] are different.
 
Take a product called cheque collection. Cheque collection products in one country use a code called X and in a second country use a code called Y. You cannot optimise the usage without standardization of these codes. So we changed our own platforms to have one single code for every single transaction type across the board, across other countries, using the Banking Automation Institute (BAI) codes. We standardised that with the help of SWIFT – our partner.
 
Then we realised that the way ERP systems like SAP have been set up by clients may not be standard. Every SAP system that has been implemented has been customised a little bit; it uses its own coding system. So we created another experiment called SAP Compile Table MT940, which we call SAP MT940.
 
What all this means is, one, you’ve created a new banking standard, and secondly, you’ve created a SAP standard. The marriage of the two will deliver seamless efficiency to a client.
 
There is a lot of re-engineering that has to be done. When a particular system has a particular code that has to be carried through and MT940 is not allowing you to do that, then we use another field such as Tag 86, for example. And we embed that code there and then we go to a client site and attach that code.
 
I can proudly say, and this is confirmed by SWIFT, that we are the biggest bank which has enabled corporate SWIFTNet in Asia.
 
What about XML, which is also an inter-operable file format?
That’s another interesting journey. Instead of having fixed file formats and fixed coding structure, you have XML, which is a very flexible bank agnostic format. Once you use the XML files, then you can interface with Bank A, with Bank B, with Bank C using the same format.
 
So as a customer I’m giving XML output, the same output that will be adopted and accepted by one bank, as well as the second bank, as well as the third bank. As a customer I have solved my problem of standardisation and integration.
 
If you go and ask the market, by and large, I think the market largely believes XML works in Europe, but in Asia it’s still emerging. But very soon, Citi will be touching almost 100 customers on XML in Asia.
 
Is it possible for a corporate to bypass Citi and link directly with its multiple banking partners using SWIFTNet and/or XML?
You can, but again as a corporate, you’ve got to have a goal. If your goal is to minimise banking interfaces, to minimise the number of accounts . . . Every account will add reconciliation overload to you, will add risks to you, will compromise optimisation because your balances sit across so many different accounts.
 
Are you seeing a lot of corporates in Asia going the SWIFT route rather than going the bank route?
I think that that is a trend, but is it there at full steam? I don’t think so, as of now. But it’s definitely the direction that the market is travelling. The most sophisticated customers are going faster. Other customers are still thinking and trying to understand what it all means.
 
You can use technologies like SWIFT’s and deal with five different banks or choose a centralised approach, like Citi’s model which runs on a single platform with centralised control features. But either way you are still opening five different accounts. You’re still being audited on five different accounts.
 
As a CFO, you have to think: Is there any incremental value versus the model that Citi or some other bank is proposing to me? If the incremental value is not fundamentally material, would I rather route it through the bank?  In some countries you may do it and in some others you may choose not do it. It really depends on what the overall value is.
 
The best thing is understand what works best in the market and then being able to understand what will fit my own organisation.
 
Being on inter-operable platforms will make it easy for a customer to move from one bank to another, wouldn’t it?
Correct. The market is very fragmented. In every country you go to, you’ll find 50 banks or hundreds of banks. In Asia as a whole, we are talking about a thousand different banks. We believe that clients will shift from less sophisticated banks to more sophisticated banks. 
 

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