As with most operations in Japan, offering cash management services is an expensive endeavour. The cost of hiring staff, licencing charges, clearing fees and the ongoing investment in technology is prohibitive and requires a strong commitment to the market. "Companies operating in Japan are demanding cash management, international trade and treasury solutions that enable them to achieve efficiency improvements, cost reductions and greater financial control - solutions that work both in the local and global context. Citibank is uniquely positioned to deliver against these needs," says Sunil Kaul, Citibank e-Business Head in Japan.
"The hardware and infrastructure needed to make our systems compatible with the Japanese-language networks run by correspondent banks and companies is significant," says Murphy at HSBC. "Then there is the cost of joining the necessary organizations and systems to offer a full range of services. To be prepared to invest this sort of money requires a great commitment to the business in Japan." Murphy says it is a volume game. "There are fixed costs to providing a full range of cash management services to clients which means you need to have a high volume of transactions to make the business viable."
The high cost of doing business in Japan is one reason why the country is rarely chosen as a location for a regional treasury centre or shared services centre. Singapore and Hong Kong - even China - are more cost-effective options.
Citibank, HSBC, Bank of America and JPMorgan are the only foreign members of Zengin, along with 2,500 domestic banks. All four are in various stages of developing and testing English translations of the system. This puts them at a significant advantage over other foreign players who must use correspondent banking relationships to clear yen transactions for Japan-based companies. This reliance on local partners lengthens cut-off times and increases the cost to the client making it difficult for banks that are not members of the system to compete.
Citibank and Deutsche Bank are also members of ANSER, a multi-bank electronic database run by NTT. "Companies that have accounts with a foreign bank and a domestic bank can use the system to make instantaneous Japanese yen transactions between accounts," says Murphy of HSBC, who is considering joining the system. "This will appeal to companies that have established operations in Japan and need to continue keeping accounts with Japanese banks primarily for relationship reasons. It will also benefit those with accounts in different regions of Japan."
The jury is still out on whether handling the local cash management needs of indigenous Japanese companies is a good business for foreign banks to be involved in. Those that are members of Zengin believe it is. "If you can't offer a client the ability to handle their yen accounts as well as their overseas accounts then you are not truly a full service provider," says Murphy. Others believe a tendency for sticking with tradition and razor-thin margins on yen accounts make it a tough business. "You really need to have the infrastructure in place to support yen accounts otherwise you are losing money," says Vignali at ABN AMRO. "And then there are the cultural factors that drive banking relationships in this country. A local company will often hold an account with a local bank for many reasons other than commercial ones."
The government's zero interest rate policy certain makes Japan a challenging banking environment where there is no money to be made on interest bearing accounts. Local banks are also known to participate in kamikaze-style pricing, often offering services for no fees at all. "Between 80% to 90% of our clients are price sensitive and will compare banks based on the cost of services," says Komori at Deutsche Bank. "Only those with a massive surplus are likely to pay whatever a bank is asking without questioning the price."
To make their operations more efficient, foreign banks are looking for ways to enhance their distribution. With few branches in Japan -- Citibank has the largest network with about 30 outlets -- the need to improve their collection capabilities is paramount. One way of overcoming the problem is to form alliances with local banks. ABN AMRO has an alliance with the Mizuho group. "The group has over 400 branches and, as part of the alliance, customers can deposit money into one of these branches and have the funds credited to an ABN AMRO account," says Vignali.
Citibank has a partnership with the country's post office giving it the ability to make collections and payments through 24,000 outlets country-wide. Thousands of Japanese companies hold accounts with the post office and, through its connection, Citibank can shift money back and forth between the post office accounts and its own. "Bricks and mortar branches are not particularly relevant for our clients in Japan. They operate through electronic channels and our goal is to ensure that we offer the best, most flexible and secure access to our solutions from the customers own office or branch," says Kaul, the Citibank e-Business Head in Japan.
"The relationship with the Post Office goes back several years and started with our consumer bank. We built on that and established a structure by which our customers can collect and pay through any Post Office branch. This is a powerful solution for our customers given that the Post Office has well over 20,000 branches located in every prefecture in Japan," says Kaul. "Our clients are now able to seamlessly access the Post Office distribution network around the country."
Deutsche Bank believes the next electronic service Japanese companies will be looking for is bill payment. The bank is planning to launch its Electronic Bill Presentment and Payment system in April that allows treasurers to invoice and settle bills electronically. "The EBPP system handles bills in yen and in foreign currencies," says Komori. "It is a revolutionary cash management tool that can either be developed internally by companies or bought from a bank. In our experience, companies are now ready to turn to banks for their bill payment needs."
Another service that Japanese companies are likely to demand is the pooling of their Asian accounts. While cash pooling has been perfected in Europe and the US, it is still a relatively new concept in Asia. A variety of different currencies and restrictions on cross-border capital flows make it difficult to offer a true regional master account service. Foreign banks are busy marketing their capabilities to Japanese companies with Asian operations. Many are running workshops in the region to show the managers of these Asian subsidiaries what new cash management techniques are available.
To be successful they must also convince the managers back at headquarters in Japan. "Local offices always refer to headquarters when it comes to making decisions," says Vignali at ABN AMRO. "Japanese companies have come a long way in decentralizing their operations but, at the end of the day, the senior bosses have to be happy with what is being implemented."