VEPA KAMESAM

I am indeed very happy to be in your midst this evening to deliver the inaugural address in the ‘Workshop on Marketing Cash Management Services’ organised by the Administrative Staff College of India. The organisation of this Workshop is important and timely on two counts. Corporations, the world over are jettisoning antiquated cash management practices and opting to put in place sophisticated cash management structures to garner the associated economic benefits and due to reasons of expediency. Conversely, banks have taken note of the enormous revenue potential in the fee-based services segment to prop up their sagging bottom lines. While appreciating the initiatives taken by the Administrative Staff College of India in organising the Workshop, I intend to take this opportunity to flag some of the relevant issues, which the banks need to address in this context.

As you are all well aware, the fundamental objective of cash management is ‘ optimisation of liquidity through an improved flow of funds’. In today’s highly competitive environment, where time is considered as money, deployment of staff to render basic routine tasks does not make economic sense. As a sequel, cash management today is not what it used to be. Electronic banking, which began as a passive desktop access to bank balances, is emerging into complex processes of liquidity management through numerous techniques.

Almost all of the corporations in advanced countries are now planning to use the services of banks to help them collect payments on monthly bills they issue to consumers and other types of cash management services. According to the findings of a Study conducted by Killen and Associates the top 400 Canadian enterprises can save $23 billion annually by applying emerging electronic cash management strategies. The Killen Study, states that in 2005, $300 billion worth of electronic payments will be collected over e-billing networks, which is a mammoth extension of cash management services. Commercial banks in the Western countries realised the tremendous potential in providing cash management services to vastly improve their profitability. In a report titled ‘The Future of Wholesale E-Banking : The Portal’ which was published by Celent Communications it was projected that by 2003, 40 per cent of the top 100 US banks will be offering advanced Internet portals to their business customers. In an urge to consolidate and expand customer relationships and to stay ahead of the competition, wholesale banks have turned to the next generation of personalised and uniform online cash management services. The ultimate cash management solution as seen by many corporates is a fully centralised management of financial and commercial payments where intra-group companies have no external bank accounts, except a local account for petty cash.

Importance of Cash Management for a Corporate Entity

Let me briefly touch upon the need to put in place a specialised cash management system by corporates. Good cash management is a conscious process of knowing when, where, and how a company’s cash needs will occur; knowing what the best sources for meeting additional cash needs; and being prepared to meet these needs when they occur by keeping good relationships with bankers and other creditors. Scientific cash management results in significant savings in time, decrease in interest costs, less paper work and greater accounting accuracy. Proper cash management creates more control over time and funds; provides timely access to information; enables easy employee related payments; supports electronic payments; produces faster electronic reconciliation; allows for detection of bookkeeping errors; reduces the number of cheques issued and earns interest income or reduces interest expense. Corporations with subsidiaries worldwide, can pool everything internationally so that the company can offset the debts with the surplus monies from various subsidiaries. The end result will transform treasury function as a profit-centre by optimising cash and put it to good use. Creative and pro-active cash management solutions can contribute dramatically to a company’s profitability and to its competitive edge. The ultimate purpose of proper management of liquidity, needless to emphasise, is to improve the overall productivity of funds.

Importance of Fee-based Services Segment to Banks

The next logical question is why should the banks be so excited about the subject. Deregulation and new technology have eroded banks’ comparative advantages and made it easier for non-bank competitors to enter into hitherto exclusive banks’ domains. In response, banks have shifted their sales mix toward non-interest income by selling ‘non-bank’ fee-based financial services by charging explicit fees for services. According to another study titled ‘Fee-Based Financial Services Markets: New Opportunities and Threats In the Internet Age’ by Killen Associates again, the market for retail and commercial fee-based financial services will exceed that for interest-based services by 2005, reaching nearly a staggering $500 billion by 2004 globally. Banks want such services to be their primary profit source for certain reasons. This revenue is more stable over time, assures a steady income and more importantly, leads to a strong relationship with the corporate client.

Types of Cash Management Services

The menu of cash management services offered by banks abroad is indeed diverse and tempting. The services broadly fall under collection services, disbursement services, information and control services, services related to electronic data interchange (EDI), commercial web banking services, sweep services, fraud detection solutions, global trade solutions and investment solutions. Collection Services accelerate receipt of payments from sales and quickly turn them into usable cash in accounts. Disbursement Services make efficient payments by reducing or eliminating idle balances in company’s accounts. Information and Control Services receive the data and provide the management capability needed to monitor company cash picture, control costs, reconcile and audit bank accounts, and reduce exposure to fraud. Financial Electronic Data Interchange (EDI) is a computerised exchange of payments between a company’s business and its customers and vendors. Commercial Web Banking Services give a wide range of services from any Internet connection, which can help streamline banking process quickly and efficiently. Sweep Services maintain liquidity and increase earnings without having to actively monitor accounts and move money in and out of them. Information reporting solutions assist companies, which need to receive account data that is timely, precise, and easy to access and interested in initiating online transactions. Investment solutions help to minimise excess balances and maximise return on available funds.

Cash Management Services - Indian Scenario

It is apposite to review the Indian scenario in this regard. As you are well aware, banks’ desire for funds has lost under the onslaught of the current slowdown. Despite the offer of very soft terms corporates are refusing to borrow, while bank deposits have been ballooning. Compelled to service the burgeoning liabilities, but unable to lend hastily and allow their non-performing assets (NPAs) to grow, bankers are forced to compete for the handful of safe bets among their borrowers. Banks chose to use the opportunity to refocus their activities, seeking clearly defined identities in terms of services and customer segments. Most of them concentrated on cleaning up their books by peeling down their NPAs. All of them attempted freezing of costs, improving operational efficiencies, and boosting productivity. The strategy of the banks, which performed well, is to use fee-based services to maintain earnings growth. With interest rates falling, non-interest income was, unsurprisingly, the fastest-growing component of the banks’ total income. Fee-based activities will complement though not substitute the core business of lending.

It is gratifying to note that a number of banks in India are offering wide-ranging cash management services to their corporate clients. All the three categories of banks viz., nationalised banks, private banks, and foreign banks operating in India are active in the cash management segment. SBI, PNB, ICICI Bank, GTB, HDFC Bank, Centurion Bank and Vysya Bank, are some of the active Indian banks in this segment. Citi Bank, Standard Chartered Bank, ABN Amro Bank, BNP, ANZ Grindlays and HSBC are the foreign banks operating in India, which are prominent among the cash management services providers. Currently, the turnover of cash management services in Indian market is estimated over Rs.25,000 crore per month. State Bank of India alone is estimated to handle over Rs.12, 000 crore per month through its product called SBI-FAST. Indian banks are offering services like electronic funds transfer services, provision of cash related MIS reports, cash pooling services, collection services, debit transfer services, guaranteed credit arrangements, sweep products, tax payment services, receivables and payables management. Foreign banks operating in India are offering regional and global treasury management services, liquidity management services, card services, electronic banking services, e-commerce solutions, account management services, collection management services, cash delivery management services and investment solutions. Going by the gamut of these services, the cash management services offered to Indian corporates are comparable to what their counterparts are getting in advanced countries. Banks realised that if they do not offer the services required by corporate customers it would result in a net loss of clientele, returns and goodwill. Banks in India need to continuously monitor international trends in innovations taking place in providing cash management services and swiftly offer similar services to their corporate clients.

The Reserve Bank of India has been taking a number of initiatives, which will facilitate the active involvement of commercial banks in the sophisticated cash management segment. One of the pre-requisites to ensure faster and reliable mobility of funds in a country is to have an efficient payment system. Considering the importance of a robust payment system to the economy, the RBI has taken numerous measures since mid Eighties to strengthen the payments mechanism in the country. Introduction of computerised settlement of clearing transactions, use of Magnetic Ink Character Recognition (MICR) technology, provision of inter-city clearing facilities and high value clearing facilities, Electronic Clearing Service Scheme (ECSS), Electronic Funds Transfer (EFT) scheme, Delivery vs. Payment (DvP) for Government securities transactions, setting up of INdian FInancial NETwork (INFINET) are some of the significant initiatives which highlight the seriousness with which the Reserve Bank has taken up the reforms in Payment systems. Introduction of a Centralised Funds Management System (CFMS), Securities Services System (SSS), Real Time Gross Settlement System (RTGS) and Structured Financial Messaging System (SFMS) are the top priority items on the agenda to transform the existing systems into a state-of-the-art payment infrastructure in India by the Reserve Bank. The current vision envisaged for the payment systems reforms is one, which contemplates linking up of at least all important bank branches with the domestic payment systems network thereby facilitates cross boarder connectivity. With the help of the systems already put in place in India and which are coming into being, both banks and corporates can exercise effective control over the cash management.

Changing Cash Management Processes and ‘ E-banking ’

The enlightened participants in this Workshop are aware that the cash management techniques have been undergoing a metamorphosis as a result of the extensive technological advancements. Positioning finance as a valuable part of a business organisation means re-engineering of business processes. Electronic Bill Presentment and Payment (EBPP) is now widely accepted in Western countries. It replaces the slow and costly process of preparing and mailing paper bills and receiving cheques as payment. Corporations look to electronic bill presentment and payment as an opportunity to expand marketing and sales efforts, enhance customer care and increase efficiency, while reducing costs.

As technologies evolve with amazing speed, the IT choices facing treasurers are becoming more intricate simultaneously increasing their expectations too. You will agree that today, a multinational company has tall demands from its banker. When the treasurer sits at his desk, he expects that his computer has to automatically update his files with real-time information on the company’s account balances. Without moving, he wants to manoeuvre funds between accounts to capture more interest from pooled accounts, he demands to lag his payments to make his cash work to the fullest and he desires to get an up-to-date report on the progress of his collections. If relieved of numerous manual errands, his treasury can effectively plan for the future. As the Internet explodes into life, companies want to be among the first to use the Internet to market their products, receive orders, deal with suppliers and settle transactions. Corporates visualise technology as a tool to cut their costs and improve efficiency.

Internet and Corporate Banking Strategy

As a result of the advent of the Internet, banks and other Financial Institutions are rethinking their corporate banking strategy. The Internet opens a new channel for delivering services to corporate clients and helps these institutions remove cumbersome and expensive paper processes. It is significantly cheaper and much more flexible. With the Internet, large multinational companies that always used EDI can save more money by eliminating the old system’s expensive private networks and expand reach to include more businesses on the supply chain. Small-to-medium size companies, too, can conduct business-to-business transactions. The Internet simply provides a two-way electronic linkage that never existed before.

So, banks can now offer a trusted solution to their corporate customers via the low-cost delivery channel i.e., the Internet. And corporations will enjoy the ability to manage cash held by their strategic banking partners in real time via a secure, efficient, Web-enabled communication system. The expected shift in volume from paper-based transactions to electronic ones would determine the path of future technology investments in banks and orient it towards electronic payment delivery systems. This shift is also driven by banks’ perception that electronic transactions contribute higher margins than paper-based transactions.

How Corporates Select a Bank for Sourcing Cash Management Services ?

Probably, it is apposite to consider what the companies expect from their bankers in this regard. It is normally the client-bank relationship, which is a main consideration in choosing a bank for cash management. Pricing, obviously, is a very dominant factor. Making a choice between the local banks and the more highly priced foreign banks usually depends on how cost savings are presented by the banks. Multinational corporates with complex treasury operations admire their respective banks’ expertise and ability to offer creative solutions. There are some common requirements related to basic cash management systems. Flexibility, reliability, security and stability have been cited as vital parameters for any electronic banking system. The systems should be tailored to provide pertinent reports and the ability to upgrade easily in future. The technology should allow real-time cash management with strategic banking partners. It should integrate easily with legal framework in place. It should lower operating costs and resolve disputes quickly by providing secure and legally enforceable audit trails. It should be capable of reducing risk of fraud in electronic funds transfers and other treasury activities. It should also be able to use a low-cost public network infrastructure like Internet, which eliminates the need for dedicated leased lines.

A Framework to Provide Effective Cash Management Services

Companies seek to achieve synergies by implementing a simplified account structure and through rationalising the number of banks used. In advising companies on the optimal account structure, it is important to bear in mind the nature of company’s funds flows. The aim is to maximise control, efficiency and return. Banks need to work with its clients to ensure that arrangements are in place to assist them in maximising returns from an otherwise idle funds. Experience of local banking regulations and market practices can ensure client’s preferred structure will not contravene local regulations. Greater challenges lie in tying together multiple accounts into a cohesive structure to manage liquidity efficiently, often across numerous time zones and currencies. To meet the needs of international corporate and institutional clients, banks should have a wide range of customised products and services. Corporate treasurers cannot afford to spend time worrying about routine payments and collections. So banks have to help clients to successfully handle the large volumes of corporate client payments.

Challenges to Companies in Availing Technology-oriented Cash Management Services from Banks

Corporates do face some challenges in putting in place new cash management structures. Analysts believe that companies will increasingly demand online real-time cash-management services. The commercial need for Internet delivery of cash management will be driven by the increasing number of businesses using the Internet and other networks.

Electronic Communication with a Bank

The first challenge facing a treasury is how to communicate electronically with a bank, although this is often dictated by cost limitations, security concerns and the infrastructure peculiarities of different countries. It is likely that the company itself may be lacking the necessary expertise to choose an appropriate form of communication where the company needs banker’s advice.

Economic Considerations

Costs associated with the new services do pose a challenge to small and medium companies. A host-to-host connection is a sophisticated, direct, two-way link between the bank’s and the customer’s computers, which is expensive to set-up and maintain. However, it is highly automated and allows the corporate to use more of the banks’ services. Small companies, unfortunately, may not be able to afford host-to-host connection. Concerns associated with high costs may be effectively addressed once the Internet’s security apprehensions have been resolved.

Limitations of the Services

All said and done, the Internet as it operates today has its limitations as a medium for banking and finance. For this reason, the conventional means of delivering electronic banking services will be maintained in parallel with on-line systems at least in the medium term. We all agree that the technology is only as good as its underlying services. There is no such thing as one-size-fits-all when it comes to electronic banking products. No one product can provide an absolute solution to all the customers. An electronic banking product is a means of delivering banking services to the customer and is only as good as all the operations and processes that underpin those services.

Provision of CMS by Banks - Challenges and Issues

The conventional formal line between treasury and control and between cash and accounting strategies is fading. Now, bankers and controllers are working together closely in seeking solutions in the complex cash management function. In today’s world, the key differentiator between a successful bank and other bank is the stress each lays on technology. As such, let me turn your attention to the numerous challenges bankers need to address squarely, while gearing up to provide cash management services in a technology dominated environment.

Provision of Customised Services

One important ingredient of a treasury system is ‘customisation’. Bank’s ability to customise a treasury system is critical. The ‘ user interface ’ is very personal and users want to be comfortable with the look and feel of the system. Deployment, configuration and database options need to be flexible. New system should be capable of easily getting synchronised with enterprise resource planning (ERP) and other corporate systems.

Need to Comprehend the Client’s Line of Activity

Bankers need to really understand the accounting and control side of its client business. The bankers should see themselves as strategic partners in company’s growth and need to spend a lot of time learning about the concerned industry. They have to use that knowledge to propose solutions that never would have occurred to the client. Banks can’t go out and propose good ways to re-engineer a company’s business processes until they have developed a really sophisticated understanding of the cash and accounting practices. Bankers, no doubt, are sharp but the technology and services are getting so complex that an officer often will need to call in a specialist from a key area.

Provision of Other Advisory Services to Clients

Companies would like to see banks solve certain other related problems. For instance, a company may like someone to tell it exactly what is wrong with their MIS department. Changing systems is a major initiative with far-reaching implications to the companies so banker cannot afford to make a mistake. As the technology changes almost monthly, companies do expect bankers to tell them what to do and where to spend their money. Bankers cannot build a standard solution always, because the customers do not pose standard problems. Bankers have to customise the solution that will resemble what the customer is wishing for.

Shift to Web-enabled Services

Web-enablement may be fashionable, but what treasurers really want is the functionality in products that help them perform optimally. After all, the web is only a delivery channel. Most corporate electronic banking systems currently used are based on old technology architecture. Banks, now, have to gradually turn to open systems architecture, wherein a Web-server accesses the bank’s back-end systems with adequate security features in place.

Decisions Regarding Sourcing of Software

The three sources of software applications for on-line banking and on-line cash management in particular, are 1) built in-house, 2) bought from independent software vendors and 3) outsourced to a trusted third party. Large banks prefer to build applications in-house owing to their belief that it provides them with competitive advantage. Building Web-enabled cash management solutions requires a thorough understanding of both technology as well as business issues. Smaller banks who do not wish to make significant investment in back-office systems prefer to outsource on-line banking services.

Understanding and Adapting to the Technology Dominated Environment

Banks can derive a clear competitive advantage only by reducing the time to market services to clients by customising cash management products to cater to clients’ specific needs; providing clients the flexibility to design their own reports and specify how they want it delivered; having flexibility to interface with the existing systems at clients’ end; getting the dual advantage of leveraging localised cash management practices and at the same time being integrated globally; and providing straight through routing of cash management transactions between various internal and external systems. The strategy for banks is to figure out how to create the right alliances to ensure that they remain an integral part of the information flow even when they don’t control the entire process. Large corporations would like to pay handsomely for technological solutions that allow them to avoid these paper disputes. Banks must find ways of getting involved in the emerging segment of electronic invoicing, preferably through partnerships with technology firms. A clear opportunity exists for banks and financial institutions to play a pivotal role in providing cash management services through the Internet. The challenge for financial institutions is to respond to this requirement or risk losing their corporate customers to existing competitors, or to new entrants who develop products for the electronic marketplace.

Special Consideration to Small and Medium Companies

When the corporate scene in India is dominated by a multitude of small and medium companies, a legitimate question that arises is, are the high-tech banking cash management services just for the large companies or do they have any immediate practical value for smaller companies also? Although technology and size may not go together banks have to cost-justify the cash management services companies use. No doubt, banks did invest a lot in the technology-based services. But with the advent of the Internet and other tools, banks should strive to make accessible cash management services to middle and small companies without totally phasing out their existing hardware.

Need to Work as a Team

When banks develop cash management solutions, they have to necessarily work directly with corporate financial controllers and their staff. When outsourcing is involved, with something as complex as payables or receivables the corporate teams get bigger and more varied. Besides financial controllers, banks have to work with systems people and sometimes marketing people.

Need to Work with Technology Vendors

A growing number of non-bank vendors also offer payment-related services to corporate clients in Western countries. Banks bring the strong relationships with customers that they have built over time. No single player can do it alone in the future because there are so many dimensions to technology and different industries need different solutions. Alliances will have to be forged, so that vendors with different technological pieces will work together to provide integrated solutions. There is no question that banks and other third-party processors are going to compete, but there may be even greater opportunities for them to work together.

Threats Posed by Third Parties

As both banks and corporations move toward outsourcing arrangements, there is a danger that a company could be hurt when a bank puts an insensitive third party in between the company and its most important customers or suppliers. Concern about vendor relations and customer relations may make companies reluctant to give up control over making and accepting payments. Bankers need to be cautious in selecting the vendor.

Concerns About Security and Risk Management

Corporate treasury information is quite sensitive. Corporations lose large amounts due to internal and external fraud. Security and trust are critical issues when it comes to electronic transmission and retrieval of important and sensitive information such as corporate treasury data. Commercial cash management is one of the most risky forms of Internet banking, therefore, it requires strong security and trust elements. These trust elements may include the authentication and authorization, preventing others from eavesdropping on confidential communications, ensuring that the information is not altered in transit and providing integrity and authentication that is legal-grade, so it can stand in a court of law. So, corporate clients do have questions about the security of information and transactions. Companies want to know what are the likely security implications. Banks are handling corporate funds and their vital information. Bankers’ priority must be to build systems that reduce the risk of fraud, the risk of error, the risk of systems failure to very low levels, provide a secure environment for the processing of transactions and sharing of information. As a matter of fact, when the value delivered is very high and the risk is very low, you have a viable and secure system.

Operational Reliability

Security is important, but there is also the whole issue of operational reliability. One of the biggest challenges in this context is taking a flexible tool like the Internet and making it a reliable business system so things that are sent arrive not only secure but on time. Internet, probably, is still a long way from being a reliable way to deliver time-critical transactions and reports. However, natural evolution really dictates moving to the Net. How to be sure that the back-up server is working? How to be confident that the system would not choke due to heavy message traffic? Those are legitimate questions, but there have to be answers, even if we can’t see them all today. The good news is that the technology exists, and we use it every day.

Evolving Role of Cash Management

Cash management is constantly changing to meet the needs of the corporate treasurer. The challenge for both corporation and provider is to keep up with developments, technology, changing regulations and fitting these in with normal business. A changing regulatory environment, new technology and mergers that expand the scope of traditional banking are redefining the traditional treasury management paradigm for both banks and corporations. Electronic commerce is evolving far beyond simply ordering goods online or buyer-to-supplier commerce.

A vast country like India presents a challenge to the Cash Manager. Considering the present Indian scenario, where Cheques are the basic form of payment and cheque clearing takes a long time, cash management services need to devise innovative methods and means to expedite the clearing to benefit the corporate customer. With the Indian economy becoming an open market economy, residents may maintain accounts in other countries and non-residents may hold accounts in India. As a result, Indian treasurers may often find themselves managing cash across geographies and time zones. In India the transaction types run from the classic paper cheque to the latest Internet initiated electronic payment. Corporations initiate and receive paper-based transactions, as well as high value and low value electronic transactions on a daily basis. Expectations from new services may not eliminate or fully replace the older traditional services. Change will be gradual but, probably, it will be firm. Fee structures for cash management services in India vary from bank to bank and also from customer to customer. Many banks price the services based upon the overall relationship, especially for multiple product solutions. As Indian banks become more consultative and total solution-oriented rather than product-driven, pricing will become even more customised. Corporate treasurers will consider the amount they can save on banking fees and the level of efficiency in their departments as a sequel to the new cash management services. After they have negotiated the best possible price, treasurers then focus on the return on excess balances. They are no longer content to leave large balances in return for no fees charged. Treasurers will look for true partnership with banks to build systems that will take them into future.

I do concede that, in our collective endeavours to propagate cash management services in India, there are other wider external issues like availability of necessary critical infrastructure. For instance, availability of requisite bandwidth for Internet connection is still a problem faced by various financial institutions. No doubt, these issues will be addressed by all concerned in the days to come. With a highly technology savvy talent in the country, India can outshine others without much difficulty. Notwithstanding the issues raised by me, looking forward, there are several exciting new opportunities for both user and provider in the cash management arena. Cash management worldwide is constantly evolving to meet the needs of the corporate treasurer, take advantage of new technology and support customers as they move into new markets. The challenge for both company and service provider is to keep up with developments in technology and changing regulations and espouse them to their normal business. The key to success will be active partnerships between corporations and their providers as no one will be able to keep up with all developments on their own.

Because of the mounting importance of fee-based financial services, all banks need to fine-tune their strategies, if they want to harness the potential in this area. They need to appreciate the dynamics of the new fee-based market, which is driven by the growth of the Internet and inter-connect applications.

There is positively a need to give up old beliefs. But it won’t be easy for all banks to capture their share and profit of the swiftly expanding fee-based market. Taking advantage of the opportunities and avoiding the threats of unprofitable products, insufficient customer service, and diverse IT applications entails an understanding of the market place, the needs and expectations of the customer and of course the competition. You all will agree that offering fee-based services is no longer a choice today to the beleaguered banker. It is a desirable compulsion to thrive. Managing cash in the emerging milieu will require a new mind-set of banker and his client. With the participation of senior bankers, I do hope that this Workshop will find some time to ponder over some of the issues I flagged in this address. I am sure all of you will have very productive time in the next couple of days and I will be happy to be appraised of the outcome of your discussions.

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* Inaugural Address delivered by Shri Vepa Kamesam, Deputy Governor, Reserve Bank of India at a Workshop on "Marketing Cash Management Services" organised by the Administrative Staff College of India, Hyderabad on September 26, 2001.