Several years after big bang opened up Japan's banking industry to overseas competitors, foreign banks are making an impression on the country's cash management business by running away with clients who are dissatisfied with their local providers. The rush of companies turning to foreign banks is the result of market forces that have plagued Japan's financial sector for over a decade.
Troubled by mounting bad loans and worsening credit ratings, domestic players are finding it hard to hold on to customers. Added to this is the impact of a consolidation in the banking sector, which has seen a number of individual banks merge to form four mega-banks.
"Customers that have had relationships with a number of local banks now find that these banks have merged and their interests are consolidated," says Paul Murphy, HSBC's head of cash management in Japan. "A lot of companies are uncomfortable with having all of their services provided by one mega-bank and want a new service provider. And rather than choose another domestic bank that is likely to be suffering from bad loan problems, many of them are choosing a foreign partner."
Another factor working in the favour of foreign banks is the withdrawal of Japanese banks from the world stage. Focused on sorting out their problems at home, the banks have been closing down overseas branches and exiting the global markets. Bank of Tokyo Mitsubishi is probably the only Japanese bank with a significant enough presence overseas to offer cash management services to indigenous companies. The rest are no longer contenders.
As corporate treasurers in Japan learn to cope in this new banking environment, many are choosing to work with a foreign bank while still keeping their accounts open with a Japanese bank, says Hideya Komori, head of cash management at Deutsche Bank in Tokyo. A relationship that extends beyond foreign currency and cross-border transactions to yen-based transactions.
"The larger Japanese companies now use one foreign bank as well as their main Japanese bank for their yen transactions," he says. "This is a fairly new phenomenon and is driven partly by the understanding that foreign banks offer superior technology for treasury services."
The transition has meant a big break with tradition for a lot of treasurers whose banking relationships have been dictated by factors other than distribution, fees and technology. Often companies that were part of larger conglomerates were forced to use the in-house bank for their cash services.
"Treasurers have had to sell the concept of working with a foreign bank to their senior management," says Kevan Albrighton, head of product development for Asia at JPMorgan.
The idea of managing cash flow efficiently is a fairly new concept for a lot of Japan's big private enterprises. In the halcyon days, companies ran such a large surplus that little attention was paid to the speedy collection of receivables, pooling of global assets and investment return on deposits. Now, as the country's recession continues to drag on, treasury departments are under pressure to analyse their balance sheets, reduce the need to borrow externally and reduce the cost of those borrowings.
Remo Vignali, head of sales and services for ABN AMRO's cash business in Japan, says companies are wising up to the cost of paying for overdrafts when cash surpluses exist in other subsidiaries. "The first thing Japanese clients want out of their cash management bank is an ability to improve efficiencies in their overnight investment accounts," he says. "They want to pool cash, link interest bearing accounts in a particular region and sweep these local positions into an overnight investment account."
The break for foreign banks to get involved in this revolution came with big bang back in 1998, when long overdue government initiatives saw the deregulation of the financial sector. Barriers that prevented foreign banks from participating in the market were brought down allowing them to join the cash clearing systems and offer yen services to clients.
Prior to this, the banks had concentrated on US dollar and other foreign currency clearing services for foreign multinationals with a presence in Japan. "Big bang allowed Japanese companies to hold offshore bank accounts which opened up a whole new market for us," says Tom Etzel, head of sales for North Asia at JPMorgan, one of the largest clearers of US dollars globally. Now banks like JPMorgan work with the offshore subsidiaries of Japanese companies, such as Sony and Nissan, offering settlement services and other wholesale banking products in the US, Europe and in some emerging markets including Asia.
"Once treasurers were able to convince their senior management to use a foreign bank they began to benefit from the process of pooling their global cash reserves," says Albrighton. "It took time for the concept of global liquidity management to sink in but now companies are using us to concentrate the different accounts they hold in countries around the world into one master account."
For the time being it seems customers are choosing European banks to handle their European accounts and US banks to handle their US interests. "Big multinational companies are reluctant to have one overseas banking partner," says Komori. "They tend to use a different bank to handle their US dollar and euro needs."
Deregulation also meant that overseas banks could now offer yen services to foreign and domestic clients. Most foreign banks are members of the Yen Clearing System (YCS) used by non-resident companies to clear onshore yen transactions. The platform is English based which makes it easy to integrate into a company's back office systems.
A handful of foreign players are also members of Zengin, the yen clearing system for locally-based clients. Membership to Zengin means the banks can expand their offerings to Japanese multinationals by handling their onshore yen accounts as well as their offshore foreign currency accounts. But the system is delivered in Japanese requiring heavy investment in translation technology to make it compatible with English language back office engines.