The challenges of paying Asia faster

Greg Murray is head of US dollar wire and clearing products, Global Transaction Services, Bank of America Merrill Lynch

Slowly but steadily, financial institutions and their corporate clients are beginning to talk about growth again. Markets are gradually shifting from a purely defensive position; the Fed has spoken about tapering its quantitative easing programme; and many companies are putting expansion back on the agenda in response, writes Greg Murray.

When talking about growth, conversations quickly lead to the prospects emerging markets offer. Asia, and China in particular, are frequently cited as exciting opportunities for increasing revenues, and with good reason. In the second quarter of 2013, China’s gross domestic product grew at a rate of 7.5%. Whilst this marked a slowdown compared to the previous quarter, it’s a growth rate about which many developed countries can only dream.

China is a major destination for investment flows today for this reason. In tandem with this, we’ve seen the popularity of the Renminbi as a currency of trade increase. Indeed, Swift’s RMB tracker has recorded continuous growth in the volume of payments made in RMB from key markets such as the UK, Eurozone and the US over the past two to three years.

However, the vast majority of higher value payments made and settled around the world is still denominated in US dollars. Even when a Chinese company sends a shipment to a Thai firm, the Thai importer will, more likely than not, pay the Chinese exporter in US dollars.

The dominance of the US dollar in trade with and across Asia has created a number of challenges for banks and their clients historically, and it continues to do so today as companies look to increase their engagement with the region as a whole.

Time zones are a critical factor. When companies are trading during Asia business hours and attempting to make US dollar payments to regional partners, it will often be outside of the US working day. This means that payment may not be made to the ultimate beneficiary on the same day, depending on whether correspondent banks participate in early hours clearing. Delays can also occur depending on the nostro reconciliation process of the beneficiary banks.

There can be even more delays when paying Asian banks that have large branch networks. Very often, provincial beneficiary banks and small local branches will not have direct account relationships with US correspondent banks, and so payments are made to the head office of the bank and passed through a hierarchy of branches from there. It can take several days for that payment to reach the end recipient at the last bank in the chain.

Such delays affect a number of normal business operations. They trap cash and reduce visibility over cash, ultimately impacting liquidity and working capital management. As a solution, various countries have developed local offshore US dollar clearing mechanisms so that Asian US dollar transactions can be completed during the Asian business day, and so that companies do not necessarily need to use a US-based bank to process payments in Asia. China, Hong Kong, Japan, Taiwan and the Philippines for example have established US dollar clearing systems and local banks can become members of these systems.

Using local offshore US dollar clearing services also has its drawbacks though. Businesses may find themselves with multiple payment accounts in different countries. This again impacts liquidity, creating fragmentation and additional operational complexity and cost when each account must be maintained and monitored to ensure there is enough cash within it to settle business. In doing business with, across and between Asian countries, these limitations ultimately create a challenge to companies in achieving their next most important priorities after growth: increasing efficiency and managing costs.

Happily new types of solutions are emerging from global banks in order to meet the demand for faster payments to Asia and to manage these challenges. So-called smart solutions typically use flexible routing technology in order to recognise payments and pass them through in-country US dollar clearing systems via just one bank account, improving speed and efficiency. They leverage the bank’s own branches in Asia and globally so that payments can be made in the most intelligent and straight-through manner possible, providing faster availability of funds to Asia-based beneficiaries during the local business day.

This removes the need for firms to have separate accounts in each country of clearing, resulting in better cash concentration and improving visibility. It also provides financial institutions with a way to differentiate themselves with their corporate clients. If clients can use a faster payments solution, they can potentially negotiate better terms on future trading business with cross-border suppliers since they can settle payments more quickly. Not only is the system beneficial for the end client, but banks offering access to faster payment services can gain a compelling marketing advantage at a time when growth and efficiency are critical for companies of all kinds.