1. thecorporatetreasurer.com12 corporate treasurer AUGUST / SepTember 2016 thecorporatetreasurer.com12 corporate treasurer AUGUST / SepTember 2016
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2. thecorporatetreasurer.com AUGUST / SepTember 2016 corporate treasurer 1
coverstory
Nothing gets CFOs more
agitated than the trials
and tribulations of KYC.
How can banks make
it easier for corporate
treasurers to open that
much-needed account?
By Ann Shi
W
e’ve said this before, but
it seems we need to say it
again: When some of the
world’s biggest companies
are struggling to open
accounts with some of the world’s biggest
banks, we have a serious problem in the
financial system.
Alawi H. Al-Shurafa, group treasurer for
Saudi Arabia-based petrochemical company
Chevron Phillips, feels the pain. He sits
atop a well-known brand with billions in
revenue ($9.2 billion in 2015, to be precise)
and assets vastly outweighing liabilities,
but is toiling to clear know-your-customer
(KYC) process with an international bank
after 12 months of paperwork.
“And we haven’t resolved all the issues
yet,” Al-Shurafa explained, adding that
this had happened to him at least twice,
indicating a general problem.
He’s not alone in struggling with KYC
clearance. Senior treasury executives at
big multinational companies, including
Damian Glendinning, group treasurer at
Lenovo, and Adrian Teng, former group
treasurer at Jardine Matheson (now group
finance director of its subsidiary, Jardine
Cycle & Carriage), have all spoken out
about the madness of compliance within
transaction banking services.
Glendinning said at last year’s Sibos
banking event in Singapore that as
regulations became more difficult and
costly to comply with, banks tended to
“go overboard” to make sure they cover
all bases. The end result? Poor customer
experience.
In Teng’s case, arranging basic credit
facilities was long and tedious; it could
take up to 12 months when he was group
treasurer at Jardine Matheson.
Sympathy for large multinationals is
scarce, but spare a thought for small and
medium-sized companies (SME) who
can’t even get on the ladder. According to
a recent study by the Asian Development
Bank and Organisation for Economic
Cooperation and Development (OECD),
only 19.5% of Asian companies have
access to overdraft facilities, compared
with 52.8% elsewhere. And just a quarter
of Asian firms have a line of credit
or loan from a financial institution,
compared with 43.6% globally. (See
graph.)
is regulation to blame?
But why is it so hard to receive banking
services? Opinions are divided. Banks,
quite understandably, lay the problem
at the door of the regulators, who they
claim are diverting their attention away
from core business.
Moreover, rules vary drastically across
jurisdictions. “There are no standards or
guidelines for the banks. Every product,
every entity – they have to go through
this [process] again and again and
again,” said Roshini Subapanditha, head
of enhanced due diligence at Thomson
Reuters, covering governance, risk and
compliance products.
Al-Shurafa believes this argument
doesn’t paint the whole picture. He
believes banks are not focusing on
thecorporatetreasurer.com AUGUST / SepTember 2016 corporate treasurer 1
coverstory
Bank on
a headache
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3. thecorporatetreasurer.com14 corporate treasurer AUGUST / September 2016
Alawi H. Al-Shurafa is struggling with red tape
Proof of concept
compliance as a pain point for customers
but rather as a pain point for themselves.
“It seems banks are more [focused on]
trying to avoid compliance violations,
which will cost them a lot of money, than
trying to grow business,” Al-Shurafa
said. “Compliance does matter to banks,
as it should,” he added, but regulatory
requirements can’t be an excuse for banks
to deal with clients the way they presently
are.
This is a reasonable point. Some of the
major game-changing regulations that, for
example, centre on anti-money laundering
and counter-terrorist financing (AML/
CTF) are major priorities, but they are long
established. Only quite recently have banks
come undone by them.
“What makes it a bit puzzling to me is
that it’s like something happened all of
a sudden and banks had no idea what to
do,” said Al-Shurafa. “It’s been an issue for
years, and you would think they’d innovate
their way out of it.”
Reflecting on this, he suggested one
way for corporates to ease the KYC pain
was to move business to local or regional
banks for non-global transactions. The
poor adaptability of international banks
“could create an opportunistic position to
local and regional banks,” said Al-Shurafa,
as they “understand and appreciate the
limitations you have and the business
environment you operate in.”
That might not work for every treasurer.
Francois Gumy, Asia treasurer of Mondelez,
recently said the complexity of corporate
operations means bank flexibility was
easier said than done. “Large companies
who work across many countries and
currencies want things to work smoothly,
quickly and as standardised as possible,”
he said. “Any new tool that in theory helps
facilitate this is attractive. We want to pay
when we want to; we don’t want hurdles.
Today it has become too complex.”
And in fairness, this is happening.
Morgan McKenney, Citi’s head of cash
management for treasury and trade
solutions business in Asia-Pacific, sees
room to digitise some bank processes: within
the account opening space, for example,
which has an AML/CTF element.
“We have a team digitising the capture of
documents, making sure that the workflow
status is clear,” she said. “We’re not where we
want to be, but we’ve made notable progress
to get on with the digitisation.”
But is this really enough? Given the
severity of the situation, maybe not. That
said, while banks struggle to come to terms
with KYC audits, they have not been shy in
buying up or sponsoring fintech startups.
Investments in financial technology
have increased 10-fold in the past five years
– from $1.8 billion in 2010 to $19 billion
in 2015, according to a Citi report titled
Digital Disruption published in March.
Fintech companies have nabbed $9 billion
in banking business so far, a fraction of
what banks bring in each year. But by 2020,
fintech revenues will leap more than 10
times, exceeding $100 billion, Citi predicts.
Not all that investment has been made
by financial institutions. Venture capital
plays a large role, but it’s clear many want
that fintech revenue to find its way back to
the banks themselves. The Pulse of Fintech
2015 in review, published by KPMG and CB
Insights in March, shows Citigroup and its
venture arm, Citi Ventures, were the most
active major bank investor in the past five
years, followed by Goldman Sachs, which
has backed Circle Internet Financial, Motif
Investing and Square, among others.
The vast majority of investment is going
It is interesting to note that some
investments by banks into nascent
technologies like blockchain are yielding
progress, with some reaching the “proof of
concept” stage.
On August 10, for example, Bank of
America Merrill Lynch, HSBC and the
Infocomm Development Authority of
Singapore said they had jointly developed
a prototype solution built on blockchain
technology that allows for sharing of
information between exporters, importers
and their respective banks.
They can “execute a trade deal
automatically through a series of digital
smart contracts,” said the consortium,
adding it was further testing the concept’s
commercial applications with selected
Companies’ access to banking services in asia and non-asia
“We’re not
where we want
to be, but we’ve
made notable
progress”
Morgan McKenney, Citi
100%
80
60
40
20
0
Small Medium Large Small Medium Large
Non-Asia Asia
Source: Author’s calculations from World Bank Enterprise Surveys data
Accounts Overdraft Line of credit or loan
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4. thecorporatetreasurer.com August / September 2016 corporate treasurer 15
COVERstory
“We want to pay when
we want to; we don’t
want hurdles”
Francois Gumy, Mondelez
into companies that focus on payments,
lending and wealth management, not
regulation and compliance management.
Al-Shurafa hopes banks’ incubation and
funding of fintech start-ups will create
value where it is needed. “Banks should
collaborate with and probably sponsor
fintech companies and projects involved
in regulatory reporting areas. This is of
mutual interest,” he said. “They could
take advantage of the adaptability and
dynamic nature of regulation technology,
or ‘RegTech’, companies to strengthen and
accelerate their decision-
making process.”
Digital identity
Given all the
technological innovation
it seems a shame the
appetite to reduce the
compliance burden is so
limited. This idea is supported
by the Institute of International
Finance (IIF), which favours applying
new technology such as blockchain and
machine learning to regulatory and
compliance challenges. “This [technology]
is particularly promising in a sector with
rapidly growing compliance costs, in
which an uncertain macroeconomic and
financial environment is putting pressure
on the sector’s profitability,” the IIF wrote
in March 2016.
One possible use of blockchain
technology is to connect it with a person’s
digital identity. Such application would
remove the need to trust a third party
partners, including corporates and shippers.
Under this concept, each of the four parties
involved in a letter of credit (LC) transaction –
the exporter, importer and both of their banks
– can visualise data in real time on a tablet
and control the next actions to be performed.
The worflow is as follows:
1. Importer creates an LC application for
the importer bank to review and stores it
on the blockchain.
2. Importer bank receives notification to
review the LC and can then approve or
reject it based on the data provided.
Once checked and approved, access
is then provided to the exporter bank
automatically for approval.
3. Exporter bank approves or rejects
the LC. Once approved, the exporter
is able to view the LC requirements
and is prompted to view through the
application.
4. Exporter completes the shipment, adds
invoice and export application data and
attaches a photo image of any other
required documents. Once validated,
these documents are stored on the
blockchain.
5. Exporter bank approves or rejects the
application and documents.
6. Importer bank reviews the data and
images against the LC requirements,
marking any discrepancies for review by
the importer. When approved, the LC
goes straight to completed status or is
sent to the importer for settlement.
7. If required due to a discrepancy,
the importer can review the export
documents and approve or reject
them.
Such results are aligned with banks’
interest. A July report by Bain & Company
estimated that around 50% of banks’ LC
operation costs arose from the manual
process of document handling and
checking. Boston Consulting Group also
acknowledged that “if embraced correctly,
digital innovation can bring significant
upside for banks … reduce operational and
compliance costs of paper-based trade by
10% to 15%, provide a platform to grow
revenues by 5% to 15%, and help banks
capture strategic advantage going forward”.
– ie, collection by a bank – by trusting
the network-agreed dataset. A person
can control his own identity information
– contained on a block – that has been
signed by the appropriate authorities.
And via “KYC-blockchain”, the person
can release his identity to a third party on
request.
“I still think that’s a long way off,
personally,” said McKenney, as it requires
regulatory approval in many jurisdictions.
But as banks, which often promote
themselves as client-centric, explore
a digital world dominated by rising
rivals from the non-financial sector, it
is important to note that sometimes
the threat isn’t about what’s to come
tomorrow, but what you face today. KYC is
the reality for today’s banking community,
and for its core clientele. Are banks
putting the effort and investment into this
area to better the customer experience, as
Al-Shurafa has questioned? Some are, but
clearly not enough of them. n
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