Increasing focus on cash management in CEE

Multinational companies usually divide the world into distinct regions for payments and cash management in order to maximise efficiency and minimise costs. These regions are determined not just by geography but to some extent also by shared characteristics. As a result, CEE is often treated as a separate region to Western Europe. The irony is that CEE is an incredibly diverse region.

By Andre Rijs, Head of TS Sales CEE at ING


Unlike much of Western Europe, most CEE countries use national currencies rather than the euro. Moreover, countries in CEE have starkly different regulatory regimes and controls regarding the movement of currency and capital.

One thing that many countries in CEE have in common is that international perceptions of their currency and country risk have changed dramatically in recent years. Where political instability and macro-economic volatility were once the hallmark of many CEE countries, they now look impressively stable compared to many countries in the eurozone.

CEE has weathered the financial and economic crises since 2008 better than its Western European neighbours and has significantly lower levels of government debt. Given weak growth in much of the developed world, multinationals are seeking new growth opportunities and markets with growing demand and high margins. Many countries in CEE – most notably Turkey with its rapid growth rate and strong demographics – fit that description perfectly.

From a payments and cash management perspective, conditions continue to improve in CEE. Some countries, such as Poland, have reached a stage in their development where they are largely indistinguishable from Western European countries in terms of their financial market infrastructure and operating environment. Nevertheless, there are still challenging markets in the region. Broadly speaking the further east one travels, the more complex payments and cash management becomes. An example is Ukraine where interest rates are extremely volatile and the regulatory environment is closed.

Consequently, international companies seeking to operate in CEE must be flexible in the way they approach this diverse region which spans open economies that use the euro and closed economies with currency controls. It is therefore essential for corporates that operate in multiple CEE markets to work with a bank that has on-the-ground knowledge and expertise of market and regulatory conditions.


What clients need

Regardless of the complexity of the regulatory environment, the number of banks they work with, the range of currencies in use or the number of individual markets in which they operate, corporates want visibility of their cash. To some extent, the complexity of CEE cannot be overcome. It is a fact that CEE countries use many different currencies and ING can help clients to rationalise their account structures and banking relationships so that they have the most efficient and effective payments and cash management structure possible in the region.

Dealing with the risk presented by multiple currencies is also a priority for multinationals that operate in CEE. There are effectively two strategies at their disposal. They can either retain local currencies or, for currencies of countries perceived to be at particular risk, convert them to lower risk currencies. Any decision about currencies must also take into account the use of funds and whether cash balances can go to a pool elsewhere or alternatively can be used to fund local operations.

Cash pooling in CEE is inevitably more complex that in Western Europe as not all currencies are freely convertible. However, contrary to many multinationals’ expectations, cash balances in currencies such as the Polish zloty, Hungarian forint and Russian rouble can now be maintained in countries including the Netherlands. Often used as a treasury location by multinationals, the Netherlands has tax treaties with most CEE countries to avoid double taxation.

Despite advances, challenges with pooling remain. For example it is still challenging to bring positions from Romania, Bulgaria and Turkey into a cash pool. However, while currency controls cannot be avoided some of the more onerous requirements associated with them can still be overcome. ING has a branch in St Petersburg in Russia – where many auto part suppliers are based – that can complete much of the paperwork associated with moving funds, thus helping to reduce the administrative burden on clients. ING can insource other activities for clients and also provide clear regulatory and tax advice on the implications of moving positions between countries.

Within CEE, clients can either physically move cash using zero-balancing account structures or adopt notional pooling structures. In some circumstances, physical cash concentration using a zero-balancing structure can be advantageous for corporates. For example, by pooling euros it might be possible to get a better return at the centre than in a particular CEE country. In some countries, concerns about the likelihood of regulatory change might encourage companies to physically take funds out of a country.

Another reason to adopt a zero-balancing structure is that corporates may need the funds elsewhere in the group or want to sweep funds back to a European hub in order to repatriate them to head office more easily. A further reason is that companies may not want to allow local operating companies to retain control over cash (as they would do under a notional pooling arrangement).

However, in most circumstances ING advises the use of notional pooling because it does not entail a change in ownership of funds or require potentially complex intercompany lending arrangements. The pooling account is in the name of the CEE entity but the central treasury has access to, and control of, the cash that can then be used to fund manufacturing in one country, for example by using sales proceeds from other CEE countries. Regardless of the strategy adopted, ING’s depth in CEE enables it to deliver standardised processes and services across the region in order to improve visibility, control and efficiency.

Meanwhile companies are increasingly creating regional payment hubs in countries such as Poland and Hungary. By being close to the markets they serve, such hubs can reflect the diversity of the region more accurately. They offer a level of skills and language capabilities similar to Western Europe but at a significantly lower cost. ING is capable of offering full support for CEE-based payment hubs as well as for accounts payables and receivables.


Risks and challenges remain

CEE continues to be a dynamic region. For example, the decision in November 2012 by Hungary to effectively double the tax on financial transactions has significant implications for corporates that operate in the country. ING is working with its clients to assess whether transactions should continue to be made onshore or if they should be moved offshore in order to lower costs. Regulatory initiatives are also impacting payments and cash management in the region. Many international companies assume that the Single Euro Payments Area (SEPA) and the EU’s Payment Services Directive (PSD) are focused solely on Western European countries in the eurozone. However, both initiatives have significant implications for CEE and corporate interest, and the impact of SEPA and the PSD in CEE is growing rapidly, particularly in Slovakia and Romania. SEPA and the PSD will enable corporates to increase the standardisation of payments and lower costs. Given the multiplicity of regulatory and other changes in the region it is essential that companies seek advice and expertise on a pan-regional basis.


What makes ING different

ING has been an integral part of the banking industry in CEE since the late 1980s. As a leading bank it contributed to the founding of many clearing systems across the region and played a major role in helping to develop the regulatory landscape. The bank’s relationships with regulators, which it mobilises for the benefit of clients, and its insight into how the landscape is evolving, are second to none.

Moreover, ING has repeatedly shown its commitment to CEE. While many international banks have proved a fair-weather friend to CEE, ING is committed to the region and its clients through every stage of the CEE’s development – including in times of crisis. Finding a banking partner in times of prosperity is easy but ING has demonstrated that it is also prepared to stand by its clients in tough times.

ING is active in the nine most important markets in CEE. Its presence in each country extends not only to payments and cash management but also to a full-service commercial banking operation. In Poland, for example, ING operates a full network with 300 branches. This depth of knowledge about local market conditions enables ING to take a proactive approach to the challenges facing its clients, for example by rapidly informing its clients about the implications of the imposition of Hungary’s transaction tax.

In every market in which it operates ING behaves and acts as both a local and an international bank, combining the benefits of flexibility and standardisation. For example, ING can provide all local products and services, including domestic payment instruments. ING offers all of its products and services with standard international terms and conditions, making it easy for multinational companies to manage their relationship with ING. It also offers service and customer support in an internationally consistent way to give clients the control and visibility they need across multiple countries. ING can also connect its solutions in CEE to any global solution in Asia, the US or anywhere else a multinational does business.

The strength of ING’s offering in CEE was recently recognised by TMI magazine for the second consecutive year with an award based on a readers’ poll. The award acknowledges ING’s history of innovation – the bank has invested heavily in solutions including electronic cash vaults that allow cash collections to be posted to companies’ accounts on the day of collection (before being physically delivered to the bank) by installing deposit machines on the client’s premises. ING has also introduced virtual accounts that allow companies to create virtual accounts for their customers so that payments are easy to reconcile. In July 2013 ING changed the way it provides transaction services to better reflect how its clients operate. Instead of individual product teams, ING now meets client needs holistically through transactional banking consultants who can address multiple product areas and find the most appropriate solutions. The integration of payments and cash management with working capital solutions and trade finance services (which includes supply chain finance, traditional trade finance products such as letters of credit and the ability to access independent trade finance platforms) is not only aligned with how corporate treasuries are organised but also ensures that solutions are structured to optimise efficiency, maximise benefits, reduce risks and lower costs.