Competition among local banks offering cash management services in China is heating up as increasing numbers of small and medium-sized enterprises (SMEs) seek more diverse products.
According to a recent report by Boston-based banking consultancy Celent, the number of cash management clients that financial institutions in China can claim as their own will rise 30% during the next three years. SMEs, which constitute 99.6% of all enterprises in China, are expected to drive the bulk of that growth. This increase is the reason for new and expanded product offerings from both foreign and local banks.
"SMEs have cash management needs as well, and even though the market penetration rate is currently low, banks will compete fiercely for cash-management business in the future," wrote Hua Zhang, Beijing-based Celent analyst, in the report. "In China, there are more than 40 million SMEs. Therefore, it is evident that although the market scale of SMEs may be smaller than that of group enterprises for the cash-management business, their trade finance, supply chain finance and cash-management needs are growing rapidly."
Since 2005, the number of companies in China using cash management tools has doubled on an annual basis, according to Celent.
Chinese banks currently have the upper hand when it comes to providing cash management in China. While the consultancy reported that foreign banks presently provide superior cash-management products, local banks have other advantages, including well established corporate relationships and extended branch networks. As a result, domestic banks provide 72% of the cash-management services to SMEs who only have operations in China.
Large Chinese enterprises have, for the most part, already identified their cash-management needs and offer banks few opportunities for new treasury business.
Chinese financial institutions are working to improve their treasury offering in order to appeal to the coming wave of new SME clients. "Chinese banks are developing more advanced and customised solutions to satisfy corporate needs, such as investment services and online cash management, and rolling these services out through branded campaigns with great fanfare," said Zhang in a statement.
The Bank of China is one example of a Chinese bank providing new services. Last year it broke ground when it signed an agreement with Japan's Bank of Tokyo Mitsubishi UFJ for the first direct connection between two financial institutions over Swift's trade services utility. The service enables banks to provide better open account trade solutions to their corporate clients. The Bank of China also worked with Swift to promote the utility in Taiwan.
"The cash-management products provided by certain [Chinese] banks in the past were mainly for consolidated cash settlement, but at present the products have expanded to cover investments, financing, risk management, etc," he explained in the report. "Moreover, as supervision over the financial market deregulates, banks can now provide services that they could not provide in the past. For example, deregulation of the capital market has enabled banks to provide more investment choices."
An expanded client base also means more revenue for banks. According to the People's Bank of China, income and fees from cash-management services totalled more than $16 billion in 2009, up more than seven-fold since 2004.
All that said, though, cash management in China remains a relatively new offering. The business was only introduced to the country through a collaboration between Citi and local banks in 1999.