Do you keep cash close to home?

Amy Goldstein, Managing Director, International Cash and Liquidity Management Sales, about the benefits of centralising USD in the United States and how it is often particularly compelling due to its status as an international trading currency and the high volume of cash involved.

Centralisation has been a key theme in corporate treasury for some years, with many corporations successfully operating regional centres to support particular geographies. Increasingly, however, we see a trend towards centralisation by currency. Corporate treasurers have created account structures to centralise critical balances by currency in the ‘home market’ for that currency. The benefits apply to every currency; however, the value proposition of centralising USD in the United States is often particularly compelling considering its widespread use as an international trading currency and the high volume of cash involved.

According to estimates by Capital Economics earlier this year, US companies are holding $2.5tr offshore: an increase of nearly 20% over the past two years, and equivalent to nearly 14% of GDP. In addition, non-US headquartered corporations, particularly from Asia, Africa and Latin America, frequently denominate and settle in USD. Given the scale of balances involved, and the ubiquity of the currency for world trade, optimising USD is critical for all companies operating internationally. Comparable value may also exist, for other major currencies such as EUR, GBP and JPY, depending on the materiality of balances and the nature of the organisation’s business model.

Keeping close to home

There are a variety of reasons why companies may consider centralising their USD (or other currency) balances in the currency home market.

  • Liquidity management
    Looking first at US-headquartered corporations; many larger companies have regional treasury centres to support cash and liquidity management, while activities such as group financing, FX management, investment etc. are more often located at headquarters. As a result, there can be significant benefits to centralising USD in the US: keeping USD cash pools and residual balances close at hand and in the same time zone while benefiting from later cut-off-times to meet investment deadlines. For non-US headquartered corporations there are investment and payment efficiency benefits of centralising USD.
  • Investments
    Having centralised liquidity, investment options are deeper in the currency’s indigenous market, with more access to markets and liquidity. This allows treasurers to meet investment and risk objectives and potentially provide value generation. At the same time, treasurers can manage counterparty risk more precisely by maintaining central visibility and control over exposures.
  • Payment and collection efficiency
    There is also an opportunity to reduce costs of cross-border payments and collections, depending on the company’s supply chain, customer base and where suppliers are located. Cross-border flows are typically more expensive, take longer to settle. As value dating is sometimes unpredictable, companies often need to maintain a higher cash buffer or put in place larger than necessary intra-day overdraft lines. Reconciliation of incoming customer flows can also be more time and labour-intensive as remittance data is frequently omitted or truncated as part of the cross-border payment process. In contrast, by centralising a currency in its home market, the number of cross-border payments and collections can be reduced, allowing companies to leverage local clearing systems that result in reduced costs, improved reconciliation and greater efficiency.

Managing the pressure

Given the pressure on treasury to ‘do more with less’, centralising funds on a currency basis can be an attractive proposition. Furthermore, the benefits of doing so are not limited to cash, liquidity and investment. For example, treasurers face a range of risk and regulatory challenges, including event risk, such as bank exits from certain product lines or markets. Managing the outcomes of this can be very taxing for corporate treasury and creates business continuity risk. Holding currency nearby at lower costs with access to the depth and breadth of the home market ensures that companies are best positioned to deal with market events. KYC requirements can also be complex and onerous, with differences in requirements between banks and markets, so centralising currencies into a single geographic location and therefore simplifying global account structures can reduce the compliance burden.

One question, however, is why treasurers have not chosen to centralise cash balances into each currency’s home market in the past. One reason is perhaps that the opportunity to do so has not always been clear. For example, in Europe, while the euro as a single currency has existed since 1999, the Eurozone effectively comprised multiple domestic markets with the same currency until the introduction of SEPA (Single Euro Payments Area). Therefore there were often either actual or perceived market or regulatory barriers to centralisation. Since SEPA payment instruments have replaced most domestic payment types, with a harmonised legal framework, more companies operating in different euro-based countries are now centralising euros into a single location. Although some domestic payment instruments remain and clearing systems in each European country have different characteristics, such as cut off and settlement times, these should not result in treasurers opting to fragment euro cash balances.

Many US companies believe that centralising funds held by offshore entities into the US creates a tax event. There are two areas of focus to consider here: co-mingling of funds and opening non-resident accounts on a stand-alone basis. Co-mingling of funds between entities registered in different jurisdictions creates a taxable event; the key is to confirm what that taxable event entails, be it double taxation treaties, thin-capitalisation rules or other issues. The opening of USD non-resident accounts in the US on a stand-alone basis is less clear and open to interpretation. There is corporate treasury precedence for both. Whenever considering these options, it is critical always to obtain independent expert tax advice.

Every country is subject to its own tax rules, so a centralised currency model cannot simply be replicated for every currency. Consequently, treasurers need to engage tax and legal departments, and their banking and other third party providers to understand the opportunities and benefits in each case. This includes exploring the way in which currency flows and exposures are currently managed, including payment and collection instruments used, the financing and investment products in place, and the applicable costs. The home market opportunities can then be explored, including optimal payment, financing and investment instruments, and any cost, liquidity or risk management advantages. This also involves looking at where customers and suppliers are located, and the potential impact on them.

Future planning

Treasurers need to anticipate and be prepared for disruptive events, and those that plan ahead by minimising risk in key currencies and maintaining centralised, flexible banking and treasury structures are likely to weather these events most successfully. Visibility and control over major balances is essential through good times and bad, and centralising cash in the currency home market can be a very valuable way of achieving this. There are a number of considerations to take into account, looking end-to-end across the supply chain, in which banks and service providers can offer advice and expertise. Investment in this process can reap considerable benefits, allowing treasury to increase its value to the enterprise and manage major currency balances cost- and risk-efficiently.   

(Source: BNP Paribas Cash Management)



Cost price and lead time of international payments

Who pays what when you make an international payment? And when will the money be available in the beneficiary's account? The latter depends on the cut-off time.

The principal and the beneficiary decide between themselves how the costs of an international payment are to be divided. This can be done in three ways:

1. OUR

The principal pays all of the costs, including those charged by the correspondent bank and the beneficiary's bank.

2. SHA ('shared')

The costs are shared. The principal pays the costs charged by their own bank, and the beneficiary pays the costs charged by the other bank(s). Within the EEA, the 'shared' option is in principle the only one applied in accordance with the PSD (Payment Services Directive).

3. BEN ('beneficiary')

The beneficiary pays all the costs, including the costs charged by the principal's bank.

Another tricky question is the duration: when will the money be available in the beneficiary's account? This depends on the cut-off time. This is the latest time at which your bank can guarantee that the funds will be credited to the correspondent banker of the beneficiary's bank on the agreed date. Remember: this does not necessarily mean that the beneficiary will receive the money on that payment date.

Alwin Vande Loock (Senior Product Manager International Payments at the BNP Paribas Cash Management Competence Center):

'The cut-off time depends on the payment method and the currency. For an urgent international payment in EUR, the cut-off time is 4:00 pm Belgian time. In principle, a beneficiary in Europe should receive the funds on the same day. An Asian beneficiary would probably receive them the following day.'



Everything you ever wanted to know about international payments

From Albania to Zambia: the BNP Paribas Currency Guide contains everything you ever wanted to know (and more) about international payments in 132 currencies.

At 420 pages long, it's quite a hefty tome to keep on your desk. Fortunately, the BNP Paribas Currency Guide is also available online. For the most recent version, click here. The guide is produced by the Cash Management Competence Center. As the head of Product Management Cash Management at BNP Paribas Fortis, Jo Germeys is very familiar with the concerns of Belgian entrepreneurs and organisations. Which is why they find this guide a useful tool.

'We try and keep our customers informed about changes in legislation or the banking world. However, companies often have so much to think about that the message doesn't always stick. This is usually not a major problem, but it does increase the risk of errors, delays and extra costs. That is why the Currency Guide is an excellent tool.'

In the past, an abridged version of this guide was available for the most common currencies, but the latest version is exhaustive, listing every currency and its associated regulations in alphabetical order. A two-page overview of each currency is provided. First of all, this overview contains clear currency guidelines. For example, that for payments in Canadian dollars you have to give not only an invoice number but also a clear description, in English, of the type of payment; for example, 'payment of travel expenses'. In addition to this standard information, the guide also explains that the IBAN format is not used in Canada. In this case, it is mandatory that you provide a full address and a nine-digit CC code. The first four digits represent the routing number, and the last five the transit number of the bank. Subsequently, there is also an explanation of how the payment must be formatted.

Alwin Vande Loock (Senior Product Manager International Payments at the BNP Paribas Cash Management Competence Center):

'Most businesses only work with a few currencies, so it's not too hard to read up on those currencies in detail and make the necessary adjustments. ERP packages are often set up in such a way that you enter the same details for all countries, and that doesn't always work.'

The five golden rules of international payments

  1. Write everything in full
    Don't use initials or abbreviations in the name or address of the beneficiary.
  2. Provide complete information
    Clearly state the purpose of your payment. You can do this by way of a description written in English, a code indicating the reason for the payment or a combination of the two. An invoice number alone is not sufficient.
  3. Use (or don't use) the IBAN format
    Use the IBAN format where necessary. This is the case for example when making payments in Albanian lek (ALL) or in Swiss francs (CHF). In Australia, the IBAN format is not in use. There, you have to indicate the BSB (Bank State Branch) code and the BIC (Bank Identification Code). 
  4. Use English (and the Latin alphabet)
    Write any information in English using the Latin alphabet. Don't use the beneficiary's language or your own language.
  5. Mind the decimals
    The majority of currencies accept two decimal places (numbers after the decimal point). There are some exceptions: the Chilean peso (CLP) and the Indonesian rupiah (IDR), for example, do not use decimal places.


1 in 200 international payments go wrong somewhere along the line

A quiet groan or a deep sigh in the finance department? Probably yet another international payment gone south. What exactly can go wrong?

Making payments is never easy, but international payments can sometimes be a real pain. Payments in euros and in the SEPA zone usually go off without a hitch.

However, many companies regularly experience problems when making payments to countries outside the SEPA zone. What's more, finding a solution is often tedious and time-consuming. There is also an impression that international payments are shrouded in secrecy. The amount enters the system, and eventually comes out the other side. But the lead times, costs and payment dates used are often not clear enough or difficult to predict.

This impression held by companies is partially correct, explains Wim Grosemans (Head of Product Management International Payments at the BNP Paribas Cash Management Competence Center).

'SWIFT data shows us that almost 1 in 200 international payments get stuck somewhere along the line. These little hitches are then discussed and investigated by the banks. This can result in frozen payments, queries, uncertainties and rectifications, among other things. The consequences for businesses vary. For instance, unexpected costs may be skimmed off along the way, meaning that the amount received by the beneficiary is lower than intended. Other problems include payments that arrive later than expected or that are even sent back.'

So what is the reason behind these errors? There are in fact several. In Europe, we are lucky enough to have SEPA harmonisation: for payments in euros, all you need to provide is the IBAN and the name of the beneficiary. Outside the SEPA zone, it is still a real jungle of currencies and specifications. In addition, you have to respect the laws and regulations of the country in which the payment is executed, the country that is the final destination of the funds and any potential stopover countries.

Alwin Vande Loock (Senior Product Manager International Payments at the BNP Paribas Cash Management Competence Center) sums up a few of the potential stumbling blocks.

'Sometimes, certain requirements have to be met in order to be able to route the payment through the local clearing system, for example the CNAPS code for payments in yuan in China or the Fedwire code for payments in American dollars. Another problem is that not all countries use the IBAN account format. For instance: when making payments to Mexico, you have to use the CLABE format. In many countries, account numbers don't even have a set structure and there is no check digit like we have here: if you enter one incorrect digit you're already in trouble, and you don't even receive a warning. Sometimes, you also have to provide very specific information about the beneficiary, such as the tax code for payments in Russian roubles to Russia. There are many steps at which things can go wrong, usually those that are still performed manually.'

Another aspect you need to bear in mind is compliance. For legal and ethical reasons, banks must be (and want to be) 100% sure that funds are not of suspicious origin or destination, and that they are not in breach of embargos and financial sanctions. A number of countries are regarded as high-risk in that respect. During compliance checks, all transactions are passed through several filters upon reaching each intermediate banker and each clearing system. This means, for example, that payments with only an invoice number and missing a detailed description risk getting caught up in those filters for longer. The same also applies to payments where the beneficiary information is incomplete, for instance.

Do you have any problems?

Contact your relationship manager or contact person at Cash Management. Or get in touch with the help desk.

Easy Banking business

Tel. + 32 2 565 05 00
E-mail: PC banking Business Help Desk //


Tel. +32 2 565 28 34
E-mail: Isabel Customer Support //

Top 3 errors in international payments

  1. The IBAN format is not used in countries where this is mandatory.
  2. The clearing code is not provided, is in the wrong format or is not entered in the correct field. The clearing code is used in many countries that don't use the IBAN format (Fedwire for the US, CNAPS for China, BSB for New Zealand etc.).
  3. The purpose of the payment is not described clearly enough. Only providing an invoice number or using unclear abbreviations can result in queries from one of the banks concerned as well as delays, especially in countries under embargo.


How to automatically get the best exchange rate

Companies working with several currencies often want to avoid exchange rate risks and administrative hassle. That is why the bank has come up with a behind-the-scenes solution: the 'embedded FX' service.

Embedded FX? You don't even need to remember the name, because the system works automatically, without you even having to think about it. FX doesn't stand for Hollywood-style special effects, but for Foreign Exchange, sometimes referred to as Cross Currency. You are guaranteed to come across this at some point if you make international payments, since they are not always executed in the currency of the debit account (referred to as 'mono-currency payments'). Sometimes, the currencies of the accounts the payment is being debited from or credited to may not be the same. These are FX payments. During such payments, an exchange takes place: one currency is sold and another bought, without you having to lift a finger.

The volumes on the FX market might be greater than you'd think. To put it plainly: they are enormous. Every day, more than 5 trillion American dollars are traded. That is 5000 billion American dollars, more than the volume involved in global equities a single day. The FX market operates day and night, and only closes over the weekend from 10 pm on Friday until 10 pm on Sunday.

Wim Grosemans (Head of Product Management Payments and Receivables at the BNP Paribas Cash Management Competence Center):

'On the FX market, banks essentially play the role of a wholesaler: they buy and sell currencies on the international market, and then sell them on to the customer with a mark-up. BNP Paribas is one of the biggest players, ranking among the global top ten. There is no official market rate in this over-the-counter market. Each bank determines the rate at which it wants to buy and sell currencies itself. Unofficial market rates can be found in publications from a number of public institutions (such as the European Central Bank) and private organisations (Reuters, Bloomberg etc.). These are based on the average rate offered by a number of major banks.'

The rate is always determined per currency pair, for example the euro versus the American dollar: EUR/USD = 1.1119. The most traded pair is EUR/USD, which represents 25% of daily trade. Second on the list is the pair American dollar/Japanese yen

(USD/JPY) with 18%, with British pound/American dollar (GBP/USD) coming in third at 9%.

Alwin Vande Loock (Product Marketing Manager Payments and Receivables at the BNP Paribas Cash Management Competence Center):

'As for the rate, banks offer a number of options. The rate can be a live market rate that is continuously being updated. The EUR/USD rate, for example, is adjusted more than 50 times per second. Another option is a daily rate. In this case, a rate is offered that will apply for a certain period.'

For many companies, all of this hassle with exchange rates is a real headache. Too complex, too expensive in terms of administrative costs and too many exchange rate risks. For those customers, banks have a solution: embedded FX.

Wim Grosemans (Head of Product Management Payments and Receivables at the BNP Paribas Cash Management Competence Center):

'When you make a payment in a currency you do not hold an account in, the bank will immediately retrieve a good exchange rate from its colleagues in the dealing room of the Global Markets department. The rate is usually confirmed within one hour after the customer has sent the payment. Unless large amounts are being transferred, the entire process is automatic. The IT systems used are much more efficient than they were just a few years ago, meaning that the bank is less exposed to volatility and can offer its customers a competitive rate. Embedded FX is an efficient and simple alternative for anyone who doesn't want to hold accounts in different currencies and run the exchange rate risks that entails. For the customer, it no longer matters what currency they use: the process is exactly the same. What's more, it gives them peace of mind, because they know that they'll always get a great rate.' 

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