Article regarding the mergers of tansaction banks September 2011

1. Lead story
A marriage made
in heaven?
Forthelastdecade,bankshavetakenvariousmeasurestointegratetheir
cashandtradebusinesses,amovetheysayputstheminastrongerposition
toreduceriskincompanies’financialsupplychainsandincreaseworking
capital.Intuitivelogic,however,doesn’talwayswintheday.Itrequires
peopletoacceptit,andsomecustomersarenotbuyingit.
In 2002, Dutch bank, ABN AMRO to use a trade instrument. A trade sales people to be able to do both
decided it didn’t want to be a “me payment is more effective than a so they were all-rounders,” says Dirk
too” in the payments space. “At that pure cash transaction. It has a lot of Braun, specialist, sale strategy, cash
time it wasn’t a renowned payments documentation to control risk inside management, Commerzbank.
bank,” recalls Ann Cairns, managing the supply chain and if the supplier
director and head, Financial Industry is confident about the person they Lars Millberg, head, Global
Advisory Group, Alvarez and Marsal are selling to, it quickly changes Transaction Services (GTS), SEB
and former CEO of transaction from a trade payment into a cash Merchant Bank, had his epiphany
banking at the Dutch Bank. (Cairns payment.” about cash and trade when he
has since left her position at Alvarez switched from cash management
and Marsal). “Upon my joining the Alicia Vicente-Vega, group head, to trade finance in early 2007. “I
bank, they were thinking of creat- sales strategy, International was doing the job for a couple of
ing something that helped the client Business Market Management, months and realised it was the same
manage their working capital and Commerzbank, says it decided to thing.” For the last year-and-a-half,
we started thinking through what bring cash and trade together from cash and trade have worked as com-
does that mean?” a sales perspective in 2004. It was bined business units under the GTS
an obvious decision for the bank, business line at SEB. Millberg says
ABN-AMRO’s “light-bulb” moment which has its roots in the trade it means the bank is better placed
came when it decided to combine business. “From the customer per- to understand a company’s entire
its cash and trade businesses. “We spective, often when we were talk- working capital needs in terms of
started seeing trade as being in ing to treasurers, we could not sep- commercial payments and liquidity.
the same spectrum of the payment arate the two [cash and trade],” says
curve,” explains Cairns. “Trade is a Vicente-Vega. “You can only survive
continuum where you may move as a bank if you think like this.” Mistakes along the way
from a letter of credit into a cash When Dresdner joined Commerzbank This is not plug and play, however.
payment and if the client wants to in 2008, its cash and trade businesses You don’t just wake up one morn-
control their risk they may decide were also integrated. “We trained ing having been a trade banker
32 Financiali·Q2·2011

2. Lead story
do we take advantage of export-import
programs?” Credit risk dynamics within
the financial supply chain are also out-
side the domain of cash management
but sit comfortably within areas such
as trade finance, says Caviezel. Equally,
with companies also focusing more
on liquidity management, he says the
proceeds of trade can be swept into a
pooling structure. “There are all sorts
of areas where trade feeds into cash,”
he says. “This is a sweet spot for those
banks that have integrated the two.”
When two became one
When banks they say they have
for the last 20 years and start talk- “unsophisticated”. “At that point trade integrated cash and trade, what do
ing cash management. It has been finance was of less interest. There they mean? Are the two businesses
more of an evolution for most banks was a lot more liquidity in the mar- integrated on both the front and the
with some stops and starts along the ket and counterparty and bank risk back end? In general they are talking
way. When SEB first attempted to was low down the pecking order. about the customer-facing side of the
merge cash and trade 10 years ago, Some banks said trade finance was business. Recalling her time at ABN
Millberg says it made the mistake of no value to their core clients so AMRO, Cairns says, “The sales role
of trying to make cash management they did away with it completely.” became multi-disciplined but further
responsible for both cash and trade. Little did they know that a financial back in the process it made sense
“There are few people in the world crisis of epic proportions was com- to maintain trade experts and pay-
who can master the two. You need ing their way and that it would help ment experts, as operationally you
specialists – product specialists that sit put trade back in the driving seat. wanted a mix.” Amol Gupte, head
together and when they work together “Today, trade finance has become an of Treasury Trade Solutions, North
the magic is created.” Alex Caviezel, attractive lifeline to a lot of compa- America, Citi Global Transaction
regional executive, treasury services, nies,” Caviezel explains. “All of a sud- Services, says a good example of
EMEA, J.P. Morgan, says 10 years ago den, the cash management relation- how cash and trade can work well
attempts to meld the two were fairly ship discussion is more around how together is the partnership Citi
‘‘ We don’t participate in SCF programs. We have early
payment discounts with customers but on a selective
basis. We don’t require these services. What we need is
cash management.”
Colin Talbot, CEVA Logistics
2011·Q2·Financiali 33

3. Lead story
‘‘ Trade finance has become an attractive lifeline to a lot
of companies. All of a sudden, the discussion is more
around how do we take advantage of export-import
programs?”
Alex Caviezel, J.P. Morgan
recently announced with Syncada a particular level of expertise. On risk in their financial supply chain and
to develop a financial supply chain the back end, she says much more gain greater visibility and control over
accounts payable solution for compa- integration is needed for data mining their working capital. “It is about mak-
nies in the transport and logistics sec- purposes, particularly in terms of cap- ing customers more aware of looking
tor. “That is being driven by my cards turing data that can be used by banks at their supply chain and where there
and trade heads,” says Gupte. “We for dynamic discounting or supply are traps and triggers for working capi-
wouldn’t have been able to do that if chain finance (SCF). tal optimisation,” says Wohlgeschaffen.
they hadn’t been working together.” “The idea is to anticipate what the
With cash and trade more closely customer will ask us next by analys-
Vicente-Vega says it is important to aligned, many banks believe they are ing their business activity. They may
maintain specialist know-how when well placed to help companies reduce ask for a specific solution, but we will
it comes to exotic solutions such
as structured export trade finance.
Training also plays a big part in
Reducing exposure to volatile copper prices
determining how successful banks “InthelastfiveyearsIhavehad notasinglefinancialinstitution
noonecomingtomefromabank, thatwaswillingtobuytheinven-
are. Braun of Commerzbank says sayingtheywanttodoaproper toryortomanageourcustomer
training is ongoing as “the mindset analysisofmyorder-to-cashcycle,” listof10,000customers.”DiFabio
saysPierPaoloDiFabio,group optedforacompromisesolution
between cash and trade is different”. financedirector,forItaly’sKME thatwaspartiallyoffbalancesheet
Some banks acknowledged that the Group,whichisoneofEurope’s andcombinedinventoryfinancing
execution can be more difficult than largestsemi-finishedproducersof andfactoring.Theinventoryfinanc-
copperandcopperalloyswith ingwasprovidedbyabank’spool
the idea itself. It entails not only a lot annualrevenuesofEUR3billion. andthefactoringbyGECapital(see
of training, but also some attrition. box page 36 ).“Usually,backin
Backin2006whenhewantedaso- 2006,banksjustwantedtosellus
Another way of ensuring cash and lutionthatexposedlessofhisbal- theeasystuff–acorporaterevolv-
trade work more closely together is ancesheettovolatilecopperprices ingloan–withoutlookingatour
andfreedupcapitaltobuymore groupcashcycle,”saysDiFabio.
to align it with remuneration. Markus copper,hesaysthebankshadlittle
Wohlgeschaffen, head of Global tooffer.“In2006thecompanywas Today,hesaystherearecertainly
financedbythesamebankusinga moreEuropeanbanksthatpropose
Trade Finance Services, UniCredit, traditionalcorporaterevolvingloan. asset-basedlendingandsome
says the overall cross-selling success Nobody,noteventhebanks,looked factoring,however,theystruggle
rate between cash and trade is surely atthecompanyasbeingexposed toprovidemulti-jurisdictionsolu-
tovolatilityincopperprices.” tions.“Whenabankoffersyoua
a key factor to be considered in terms solutionstructuredbythemthey
of incentives and bonus determina- DiFabiowantedsomeoneto usuallydonottailorittoyourcash
financehisinventory(copper)from cyclesoyouneed,sometimes,to
tion. Nancy Atkinson, senior analyst, themomentheboughtittothe adapttothestructure,”hesays.
Aite Group says [cash and trade] are momenthesoldtothecustomer, “Theyaretryingtocreateastand-
reducinghisriskandenablinghim ardproductandsellitmassively.
definitely becoming closer but it is not togeneratemorecash.“Therewas Theyarenotflexibleenough.”
seamless as trade finance still requires
34 Financiali·Q2·2011

4. Lead story
say, ‘have you taken into consideration are many other things for the CFO customers but on a selective basis.
your inventories and are you aware to focus on when it comes to work- We don’t require these services.
that in comparison to your peers ing capital.” Not all treasurers see the What we need is cash manage-
you are lagging in these areas?’” value of combining cash and trade. ment.” Wohlgeschaffen says if banks
Solutions such as supply chain A survey financial-i conducted of explain the advantages of looking
finance have come to embody corporate treasurers globally about at cash and trade across the entire
this marriage between cash and how they value different transaction supply chain in terms of improved
trade. “First we had cash and trade banking services, showed that trea- liquidity by means of concrete tangi-
integration, now it is supply chain surers placed a higher value on cash, ble figures, then treasurers are more
finance,” says Alexander Malaket, payments, collections and liquidity likely to listen.
president of OPUS Advisory management solutions and said they
Services. “Some of the leading wouldn’t be willing to pay over exist- But Talbot’s comments suggest it is
players are doing some big dollar ing rates for services in trade, but more about the banks wanting to
business in supply chain finance would pay 5% over listed rates for sell a mix of solutions to companies
as some of the more traditional cash and liquidity management rather than corporates actually ask-
products are dwindling.” solutions. ing for them. “It’s not about selling
individual, or specific products,”
Supply chain financing can give Colin Talbot, director, treasury opera- asserts Chris Bozek, global trade
companies that are cash rich a tions, CEVA Logistics, says in the last and supply chain product head,
higher return than if they placed it six months he has received more Bank of America Merrill Lynch. “It
in a corporate deposit, says Brian visits from banks saying they have is about the treasury and trade sales
Shanahan, senior director, REL integrated cash and trade. However, team and client managers consistently
Consultancy, which advises com- he adds, what the banks are offer- putting themselves in the shoes of
panies on working capital manage- ing is nothing really new. “It hasn’t that client and thinking in terms of
ment. However, there are numerous made a lot of different to us. We working capital optimisation. Banks
obstacles to overcome for SCF to are optimising our cash globally by need to fully understand how their
work. The challenge for the banks, having better credit terms and using clients are conducting business.”
says Shanahan, is whom do they bank guarantees to extend terms. We Gupte of Citi maintains that cash
sell to? “The treasurer doesn’t run don’t do factoring and if we did our and trade is about having a con-
the company, so they may take a CFO would prefer to do it internally versation that is richer than an
solution but they cannot ensure it rather than go through a bank, as the individual product. “Yes I am sell-
will be implemented in a big way. banks would charge us for that. We ing them more products, but not all
If it is CFO-led it is more likely to don’t participate in SCF programs. We clients are going to buy the entire
be successful, but in general there have early payment discounts with spectrum. They will take pieces of
‘‘ We trained sales people to be able to do both so they
were all-rounders. Training is ongoing, as the mind-
set between cash and trade is different.”
Dirk Braun, Commerzbank
2011·Q2·Financiali 35

5. Lead story
‘‘ There are few people in the world who can master
the two. You need specialists – product specialists
that sit together and when they work together the
magic is created.”
Lars Millberg, SEB Merchant Bank
it, which are important to them – a changed. With more than 80% now act as a strategic banking partner that
cards program, receivables financ- conducted on open account, banks understands, anticipates and satisfies
ing. You are selling them a long- need to move with their clients by customers’ needs. The savings for
term product vision, and it doesn’t giving them a set of comprehensive clients are more difficult to quantify.
always have to be with one bank. solutions, which makes the cost of “It depends if clients are efficient
It’s about the bank being seen as a switching banks, higher. in managing their working capital,”
trusted advisor.” says Gupte of Citi. “Where they are
But do banks really understand all efficient, the percentage of value we
One cannot ignore, however, the the complexities of a company’s can deliver is higher.” Millberg of
underlying forces at work that are financial supply chain (see box page SEB is more pragmatic about how
forcing banks to have this deeper 34)? And how do they gauge the far the bank’s experiment with cash
conversation with their customers. success of this combined approach? and trade has come. Citing Winston
While some payment services have If they get it right, there are obvious Churchill: “This is not the end. It is
become commoditised, Bozek of balance sheet benefits in terms of not even the beginning of the end.
BoAML points out the opportunity fee income and the ratio of product But it is, perhaps, the end of the
for banks to “create value beyond usage. Wohlgeschaffen says the true beginning,” Millberg says, “People
that payment event”. Trade has also measure of success is the ability to need time, but we are not in a rush.” //
GE Capital – An alternative approach to working capital management
In2006,whenPierPaoloDiFabio,of of“unlimitedcapital”comingtoan solutionsratherthanstandardised
Italy’sKMEGroup,whichisoneof endinthewakeofthe2008financial bankingproducts.”
Europe’slargestsemi-finishedpro- crisis,Nelsonsaysalternativeforms
ducersofcopperandcopperalloys, offinancingsuchasinvoicediscount- Butsurelybespokesolutionscost
waslookingtosellhisreceivables,he ingandinventoryfinancearebecom- more?Healeysaysdistributionfinance
turnedtothefinancingarmofindus- ingincreasinglyattractive. maybemoreexpensivebuthaving
trialgiant,GE.GECapitalprovideda accesstocashmeanscompaniescan
non-recoursefactoringlinetoKME. GeoffHealey,commercialleader,EMEA, investinsomethingthatcouldearn
“Atthetime,GECapitalwerethe GECapitalCommercialDistribution themahighermarginorearlypayment
onlyonesabletoprovidethesolu- Finance,saystheylooktounderstand discounts.“Atthetimepeoplewere
tion,”saysDiFabio.“Theyareperhaps acompany’sbusinessinmoredetail. sayingtome,whyareyousellingyour
betterplacedbecauseinternally “Manufacturerswantafinancingcom- receivables,isn’tthatmoreexpensive?
theyhavetheirownindustrialgroup panythatunderstandstheirindustry, Isaiditwasacommittedlinebecause
whichtheyfund.” productlifecycleandthevalueofthe itismymainfinancing.WhenIsellmy
producttheysell,”heexplains.“We receivablesIhavezerorisk.Itisimpor-
“We’renotabank–weunderstand lookatthemanagementteam,their tantformyshareholdersthatIgener-
industrydynamicsandthefinancial strengthsandweaknesses.It’snotjust aterisklesscashandnotraisedebtto
characteristicsofcustomers,”says what’ssittingonthePL.Howmany financeinvestments,whichismore
JohnNelson,commercialleader, tradecycleshavetheybeenthrough importantthanthenumberofbasis
Lending,GECapital.Withtheperiod andsurvived?Itisaboutbespoke pointsIampaying,”saysDiFabio.
36 Financiali·Q2·2011