Staff writerBye-bye banks. Some major manufacturers and trading houses are trying to bypass banks for foreign exchange transactions.While it may benefit these firms, the April 1 deregulation will lead to a tough survival game for banks in the foreign exchange business. Under the revised law, firms in Japan can settle their payments in foreign currencies and simplify cross-border settlements among firms."Finally, we can do the kind of netting that we have wanted to for 10 years," says Kenichi Ota, general manager of the treasury division at NEC Corp. In April, the leading computer manufacturer will incorporate its Tokyo head office and a subsidiary into the global multilateral netting system involving its 25 affiliates in the United States, Europe and Asia.By netting, companies cancel out credits and debits between each other and settle the balance. In cross-border settlement, bilateral netting is already allowed with the Finance Ministry's permission, but multilateral netting is not.By multilateral netting, a netting center totals credits and debits among all firms in the group and settles the final bill with each company.At present, the head office and subsidiaries in Japan and overseas settle their debts between themselves. By multinetting, the head office receives $200 from the in-house bank, or netting center, and pays nothing. This way, the business group as a whole can reduce the gross cross-border remittance from $1,800 to $800, saving commissions the firms would have paid to banks.NEC's financial subsidiary in London began international netting in 1987. The netting -- including Japan, with a newly automated netting system -- would be able to save 1 billion yen a year, because it would allow the firm to reduce the amount of foreign exchange commissions and money transfer fees it has to pay and also because it would be more efficient, Ota says.Settlement between manufacturers and trading firms will be changed. Now, firms in Japan basically have to change dollars to yen before paying each other. Such payments must go through banks, which charge commissions, and are affected by exchange rate fluctuations.In November, NEC agreed with two leading trading firms to receive payment for exports in dollars. Importing materials and exporting products both in dollars can eliminate those costs and risks. "I don't think many (Japanese) firms can do international netting," Ota says, because only firms that operate globally can enjoy the actual benefits.Marubeni Corp., a major trading firm, plans to set up a subsidiary "in-house bank" in April at the earliest. The in-house bank will first handle multilateral netting among some 50 firms around the world, including the head office in Tokyo. Eventually, it is expected to act as the finance center to handle the financial affairs of the group's hundreds of firms around the world.The grand vision toward the next century has emerged out of necessity rather than the advantages of foreign exchange deregulation, says Fumio Ito, assistant general manager of Marubeni's finance department. "There are external and internal factors behind this," Ito says. The firm's affiliates are facing increasing difficulties in borrowing from banks as banks are curbing their lending. The firm also aims to reinforce its business group as a whole so it can raise funds as cheaply as possible, he says.While Marubeni can benefit at the expense of banks, major manufacturers can benefit at the expense of Marubeni. For instance, more manufacturers are expected to demand that Marubeni conduct settlements in dollars, and the firm then will not be able to refuse, Ito says, referring to the reverse side of the situation -- as shown in NEC's plan.All things considered, the deregulation will save nearly 200 billion yen yearly for manufacturers and trading firms combined, according to an estimate by Yasushi Hayashi, a senior economist at Sumitomo-Life Research Institute. Thus not only banks but trading firms will lose part of their income, Hayashi says.Banks may expect corporate deposits in dollars to increase as more firms need to pay in the currency. But this will not offset expected the losses expected in the foreign exchange business, banking industry sources say.So banks are trying hard to survive. Dai-Ichi Kangyo Bank, for instance, is developing systems, including an international zero-balance account service, to help international firms manage their money. The zero-balance service would bring the balance of each affiliate's account to zero at the end of each day by concentrating the firms' deposits and debts at the head office. Due to the concentration, the head office could distribute higher interests to affiliates that have extra funds and provide cheaper loans to those short of funds.This kind of service is already in domestic use, and DKB eyes the deregulation for international use, says Masahiro Enowaki, assistant general manager at the bank's electronic banking planning division. Enowaki says corporate customers will be selecting banks. "Major American banks such as Citibank or Chase Manhattan Bank would take away our customers if we did nothing," he says. On the other hand, DKB can take shares of weaker banks that cannot develop advanced systems for netting, according to Enowaki.The foreign exchange business in Japan is said to be oligopolistic, with six major banks accounting for some 70 percent of trading. Fiercer competition will leave only three to four banks in the field, an official at another big city bank says. "Winning banks will be able to increase their profits," he says, assuming that his bank will do so.
