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Treasury Insights

Six Strategies for International Banking

If your business is looking to expand beyond the US, effectively managing your organization’s growth will depend on your ability to design and implement appropriate international funding solutions. Use these six strategies to help your business tackle the challenge of creating an optimal international banking structure.
Lorraine Reategui, Managing Director, J.P. Morgan
February 9, 2016

We see it all the time. When an organization expands overseas, its treasury department may encounter the daunting task of developing a banking structure that not only improves visibility and enhances control but—most importantly—maximizes efficiency. Treasurers face increased pressure to integrate operations and centralize management of disparate supply chains across multiple continents.

Whether your company is in three countries or a dozen, effectively managing your organization’s growth will depend on your ability to implement appropriate international funding strategies and solutions.

While every industry and business faces unique challenges, we tend to see growing companies make similar mistakes when they expand internationally. Using these six strategies can help your treasury avoid the common headaches of international banking and get an optimal international banking structure up and running.

1. Design for the Long Term

There is no one-size-fits-all model to international banking. When developing a structure, consider your business’s trajectory and the long-term goals for new overseas operations—and consider the scenarios when centralization makes the most sense.

If your operations are primarily focused on serving needs at home, a high degree of centralization may be appropriate. For example, if a new operation in East Asia is exclusively engaged in supply chain management, then a banking structure that places all decision-making authority with the North American headquarters would be ideal. But if a business intends to make inroads into markets abroad, a less centralized model could provide a greater degree of flexibility and responsiveness to local needs.

Centralized decision making may not serve your business well if you’re prioritizing it over your ability to adapt to regional needs. For instance, a treasurer’s first tendency may be to embrace the maximum amount of centralization possible, as it facilitates the goals of visibility and control. But not every decision needs to be approved at the home office, and a structure that prioritizes centralized control over regional flexibility can hamper growth, as well as create regulatory headaches. In some cases, leaving greater room for autonomy in regional banking structures can facilitate future growth, especially if your business’s focus eventually shifts towards high-growth markets abroad.

2. Start at the Top

In order to execute your treasury agenda, gaining senior-level buy-in is crucial. Optimizing your banking structure will likely require resources and cooperation from a variety of stakeholders. Before starting the project, you should prepare a solid business case that shows the shortcomings of your current structures, as well as the potential risks and rewards of your proposed modifications. Clarifying the project’s KPIs beforehand will help set you up for success when tracking the program’s performance, ensuring that support doesn’t fade midway through implementation. Throughout the project, maintaining a constant focus on your structure’s KPIs in improving visibility, gaining greater control and reducing costs can help ensure buy-in from crucial stakeholders.

3. Prioritize Rationalization

Rationalizing accounts through an integrated global banking structure can provide numerous benefits. Consolidating accounts among a handful of banking partners may allow you to minimize counterparty risk, reduce borrowing costs, negotiate lower transaction fees and centralize control over banking decisions.

Account rationalization may also provide opportunities to leverage banking technology and adopt automated controls that can enable advanced treasury structures. The creation of payment and receivable factories, or the adoption of cross-border notional pooling, may be far easier when your accounts are fully rationalized.

4. Gain Operational and Financial Control

The ideal international structure will help your business gain centralized control of key decisions, while maintaining flexibility at the local level. The choices you make when designing your banking structures will determine the amount of autonomy retained at the local level, hopefully striking that necessary balance. Consider how you might benefit from:

  • In-house banking: The creation of an in-house bank can provide highly centralized control over funding decisions while also allowing subsidiaries to maintain responsibility for routine operations. Creating a centralized entity that can manage intercompany loans and makes investment decisions on behalf of subsidiaries can allow headquarters to maintain more control over the flow of funds, while interfering less with routine business functions abroad.
  • Payment factories: Attaching payments and receivables factories to an in-house bank can provide centralized control over operations as well. By routing every invoice through a payment factory that transfers funds on behalf of your subsidiary, you can increase visibility over all aspects of the subsidiary’s operations, from supply chain sourcing to final sales. A payment factory also creates an opportunity to implement a set of automated controls that govern routine spending decisions.
  • Shared service centers: Alternatively, creating shared service centers can provide foreign subsidiaries with access to company-wide resources, centralizing key operational areas while maintaining a decentralized local funding structure. This can be advantageous for subsidiaries operating in nations with tight currency controls or unusual regulations that make international financial integration problematic. A shared service center allows a subsidiary to retain local banking services while still leveraging corporate expertise to manage complex operational areas such as human resources, IT or purchasing. 

5. Remember That All Business Is Local

The degree to which you’ll be able to consolidate financial structures among international operations will likely vary significantly between regions. For example, operations in Europe are ideal for creating highly integrated structures. Every nation in the SEPA region has adopted a standardized set of regulations that make integrated banking operations simple and efficient.

On the other hand, treasurers trying to consolidate banking structures in Southeast Asia or Latin America are faced with a daunting patchwork of national regulations and currency controls, as well as foreign exchange risks. The transaction costs and regulatory burden of an integrated banking structure in these regions may prove prohibitive.

In short, your banking structure should be capable of accommodating regional variation, while taking advantage of opportunities to reduce transaction costs and increase oversight through centralization.

6. Ensure Banking Decisions Reflect a Universal Policy

As your business grows, it’s important to take a critical look at existing banking structures and make sure they’re developing in alignment with global policies that govern foreign exchange, debt and cash flow management.

A clear and comprehensive policy is especially important for businesses that have adopted a relatively decentralized, autonomous approach to banking for foreign subsidiaries. A universal policy that sets risk management guidelines and cash flow goals for the entire corporation can help local subsidiaries make proper decisions while operating autonomously.

 

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