Best Practices in Cross-border
Payments to Support Globalisation Strategies
Globalisation is a
phenomenon most treasurers want to leverage to bring their organisation to
the next level of success. This article examines the global payments
solutions and best practices to provide the infrastructure to support the
myriad of cross-border and cross-currency flows required by multi- and
transnational corporates that have a worldwide footprint of vendors,
employees, customers and shareholders.
Treasurers understand
that globalisation opens the door to vast opportunities for their
organisation and want to know how best to leverage this phenomenon to bri=
ng
their organisation to the next level of productivity and efficiency. How =
can
they take advantage of the avenues made possible for their company through
globalisation - the ability to have a footprint of vendors, suppliers,
employees, customers and shareholders that span countries worldwide, in t=
he
most efficient manner?
Globalisation, the integration of the world economy, is a long-term
trend that has evolved over time, carrying profound implications and
opportunities. It has been driven by the development and growth of
international transport and telecommunication, initiatives to promote free
trade carried out by international institutions, such as the World Trade =
Organisation
(WTO) and the International Monetary Fund (IMF), plus advances in technol=
ogy
that has reduced overall costs of trade. Equally important are the decisi=
ons
of many countries to open up their economies to global trade, such as Ind=
ia,
as a hub for software, and China as a hub for manufacturing.
Flows that were previously more concentrated
within national boundaries, perhaps due to tariffs, high transportation c=
osts
or capital controls, are now easily transferrable across countries. As a
result, business units should look outside of their base country for the
optimum business partners and suppliers. If an Australian mining company
finds that a Swedish company provides the best mineral-cutting equipment,=
it
should not have to worry about whether it can pay the supplier in Swedish
krona. A manufacturing company building a sales force in non-presence
countries should not have an issue with expatriate payroll. Pensioners who
retire overseas want to receive pensions paid in the currency of the coun=
try
they live in - this should not be a headache for organisations to provide.
What is the optimum payments infrastructure to support this?
The payments infrastructure required to
participate in cross-border flows can either be gradually built over time,
country-by-country, or organisations can take advantage of international
payments solutions that have a single window for global reach, are quick =
and
resource-light to implement, and are easily scalable.
Account-based Payments
The traditional approach to facilitate
cross-border payment flows has been to: open and maintain bank accounts f=
or
each currency that payments must be made in; and work with banks to send
payments funded from account balances. This framework demands a number of
requirements:
Country-specific payments expertise=
A knowledge base of country-specific payments
regulation, market practices and requirements are needed, and must be kept
up-to-date, since regulations, laws and payment rules can change. For
example, in order to make a Korean won payment, a company must provide its
bank with the phone number of the beneficiary. Because of Korean currency
restrictions, the bank has to call the beneficiary to verify its existence
before making the payment.
Operational workflow and currency positions
Local bank account reconciliation and mainten=
ance
is required, and may be costly, especially if a number of banking provide=
rs
are used. Cash balances of the various currency accounts should be monito=
red
regularly, in order to avoid idle cash balances across currencies or lack=
of
funds. Currency positions will need to be considered, and foreign exchange
(FX) must also be managed to fund the payment accounts when required.
Addition of new currencies
The time to fully implement a new currency un=
der
this method may be lengthy, as factors such as bank account opening
processes, training and testing must be completed. Each bank will have its
own requirements, and even within the same bank this can vary depending o=
n the
currency and domicile of the account.
An account-based payments process can be cost=
ly
to build and maintain, therefore organisations should revisit the currenc=
ies
they are supporting under this type of structure, and re-evaluate the need
for this structure. For example, an account-based payments structure for
non-core currencies for which there are no incoming funds received in that
currency may incur excessive direct and indirect costs, and hence will no=
t be
the most efficient method. The benefit of working with a global cash
management bank under this structure is the breadth of countries they can
cover, allowing organisations to work with a smaller number of banks.
Non Account-based Payments<=
/span>
The alternative approach, ideal for non-core
currencies, is to fund payments in multiple currencies from a single bank
account. The fundamental concept allows organisations to make payments in=
a
currency without holding a bank account in that currency. This solution
accepts funding for payments in a single base currency (such as US dollar=
s),
executes the FX purchases required, and also sends the converted funds in=
the
desired currencies to the end-beneficiaries. For example, a French company
can use euros to fund Hong Kong dollar, Brazilian real and Polish zloty p=
ayments
to recipients in Hong Kong, Brazil and Poland - straight from their euro
account.
This single-account structure enables
organisations to process complete end-to-end multicurrency payment
processing, including FX conversion, through a single window. Rationalisa=
tion
of cash accounts could result in vast cost savings as companies benefit f=
rom
workflow simplification, reduced currency exposure, consolidated funding =
and
FX aggregation.
The simple concept of non account-based payme=
nts
in fact requires a complex infrastructure and integrated FX process in the
background to be successful. Furthermore, as the international payment ne=
eds
of organisations evolve over time, global payment providers must continuo=
usly
improve their products to meet these needs, while keeping things as simpl=
e as
possible for their clients. Advanced non-account payment solutions should
offer a wide range of payment methods, such as funds transfers, low-value
automated clearing house (ACH) payments and cheques, to cater to the need=
of
the both the sender and recipient of the payments. Multiple customer
interface options should be offered, and expanded as organisations adopt =
new
connectivity solutions, such as the ISO 20022 XML format and the SWIFT
channel.
This may seem like a relatively new solution,=
but
Citi’s clients have been achieving this for over 25 years through
WorldLink Payment Services (see Figure 1). With one WorldLink installatio=
n,
payments can be made in 135 currencies, using virtually all payment types=
-
wires, ACH, remote and on-site cheques, and even cash - from a single-base
currency account. It is brought to users via their interface of preferenc=
e:
host-to-host connectivity, electronic banking or SWIFT. The bank manages =
the
systems and operations on behalf of the clients. For example, on-the-grou=
nd
experts globally track ever-changing country regulations, payment rules a=
nd
formatting standards.
Figure 1:
WorldLink Payment Services Workflow
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Source: Citi
Conclusion
The value that truly global cash management
providers bring to the table is an ability to provide the infrastructure =
that
enables companies to support a worldwide footprint and become truly
multinational and transnational. Companies can build their own payments
infrastructure, leverage a single account global payments solution, or st=
rike
a balance of both in a hybrid structure.
Maintaining their own payments infrastructure
requires an organisation to open and maintain accounts in each of the
currencies they wish to pay out in and to support this with adequate FX
capabilities and a knowledge base around country-specific regulatory and
payment market practices. Leveraging a global payments solution, such as
WorldLink where multi-currency payments can be sent from a single account,
provides companies with a single window for global reach, is quick and
resource-light to implement, and easily scalable across all currencies.
Payment solutions can be further tailored to address industry and
client-specific needs.
Article by Merisa Lee is a market
manager for Citi's WorldLink Payment Services, covering Europe, the Middle
East and Africa (EMEA). Lee is responsible for cross-border payments
solutions for a wide range of clients including corporations, financial
institutions and public sector entities. Prior to this, she has had vario=
us
roles in treasury and trade solutions (TTS) and securities and fund servi=
ces
(SFS) at Citi. Lee joined Citi in 2006, and holds a BSc Hons in Economics
from the London School of Economics (LSE).
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