International cash management meets the global challenge

by Jack and Wolfi Large

Supplement: Technology in Treasury Management Guide

International cash management (ICM) will always be a tricky business, coping as it must with many different cultures, legal, tax, banking and payment systems, as well as companies’ head offices and subsidiaries. Yet it continues to expand to cover more areas, driven by companies’ demands for more efficient anfd complete business services. Partly in response to those demands, but also to add value to their services, banks are increasing their coverage, functionality and support.
 
 There is growing acceptance in banks of the importance of ICM, as senior bankers come to appreciate how critical these services are to their clients. “Cash management is a vital service for companies and a cornerstone in the relationship between banks and their corporate clients,” says Bruno Lavole, BNP Paribas’ new head of ICM and a senior corporate banker for many years. “To stand out from the pack, banks must at the same time deliver a long-term commitment, as contracts are typically three to five years and require high-quality, reliable 24/7 365-day service.”
 
 This article continues the annual ICM reviews formerly published in Corporate Finance magazine, which began in the 1990s, the last of which appeared in November 2004. It covers the general trends in ICM and the services 10 leading banks around the world offer, plus their missions in the ICM business, before describing the coverage and services of the six global network banks, the banking clubs and the leading cash management banks in the Asia-Pacific, European and Latin American regions in January 2006.
 
General trends

Companies have always wanted ICM solutions customized to meet the needs of their individual structures, market environments and future plans. Now, both individually and collectively, they are becoming more insistent that they want open standards for cash management formats and interface protocols, wherever possible, and also much tighter integration of the whole working capital cycle and financial supply chain.

Interestingly, banks are reporting that corporate ICM requirements are now basically the same worldwide, the only differences being in how their solutions can be implemented. Since our last survey the main developments in corporate requirements for ICM services have been:

•  continued and growing demand for centralized cash management solutions in general, with specific demands for full global solutions or at a least global oversight with regional autonomy (previously very few companies were looking for global ICM solutions), as well as regional solutions or regional oversight with local autonomy, though growth in this area is considerably slower;
  
  
• growing demand for greater efficiency and more control to comply with increasing regulatory requirements, including the US’ Patriot Act and Sarbanes-Oxley legislation and international accounting standards;
  
  
•  the corporate treasury departments of many large companies have now automated most of their activities and, although they are still tidying up their procedures and business flows to improve straight through processing (STP) levels, they are increasingly focusing on areas that impact on the productivity of their business as a whole, rather than just cash and treasury management;
  
  
•  large companies assume that leading ICM banks will have the necessary infrastructure, connectivity and payment system memberships to meet most of their requirements and are increasingly looking to the banks to be trusted advisers and business partners;
  
  
•  many medium-sized companies have the same cash management objectives and strategies as larger companies, but are often less able to implement the latest solutions and technologies because of lack of funding and economies of scale;
  
  
•  acceptance of partner banks and banking clubs in ICM solutions seems to be growing, with general acceptance from most medium-sized companies and even some of the larger companies overcoming their reluctance to use partner banks;
  
  
•  the rapidly increasing range of ICM options and standards seems to be causing some confusion in corporate treasury departments.
   
  
  

The main developments in banks’ ICM services and delivery have been:

•  the merging of cash and trade services to provide integrated ICM services, for example, Barclays’ cash and trade solutions department;
  
  
•  a steady move to open standard-based, non-bespoke services, such as the Swift Member Administered Closed User Groups;
  
  
•  all the banks have continued to fill the gaps in their ICM product functionality and coverage. For example, Standard Chartered Bank over the past 18 months has developed host-host partnerships with banks in China and acquired local banks in Indonesia and South Korea, and single-currency multi-country cash pooling is now being offered by most of the major banks;
  

 partner banking continues to evolve with:

•  banks developing host-host links with key partner banks to improve consistency and quality of service, such as the JP Morgan-ING link, and Standard Chartered Bank’s links with key partners in Asia-Pacific;
  
  
•  Citigroup is using partners where essential local links are needed to provide a complete ICM solution, such as in forming partnerships with post office networks in the Asia-Pacific region;
  
  
•  a general expansion of partner banking in most areas of the world except the Euro-zone, where partner banking will inevitably decline when the Single European Payments Area becomes fully operational. Several major ICM banks already have exit plans. As one senior banker put it: “I only use partner banks by necessity today. In the longer run, in the SEPA region partner banking is dead” (for further information on developments in SEPA see the Payment Systems.
  
  
•  all the major ICM banks are focusing on achieving significant  economies of scale to ensure they remain competitive and profitable as the income from payments and most standard ICM services continues to decline, leading to joint ventures, such as the Fin-Force third-party processor of cross-border payments, in which the shareholders are KBC Bank, Rabobank, Transaktioninstitut/DZ Bank and EDS, as well as major banks seriously promoting the white labelling of their ICM services by smaller banks;
  
  
•  for successful banks the cash management business is growing significantly, for example:
  
  
•  Standard Chartered Bank experienced 118% growth in electronically initiated cash management transactions over the past year;
  
  
•   JP Morgan’s cash management business in Europe has grown dramatically over the past three years. Steve Donovan, senior vice president, says: “We view Europe as a strategic area for growing our business. Corporates are increasingly looking for integrated solutions and our business model complements their needs”;
  
  
•  Citigroup’s Global Transaction Services Division, which has 45,000 corporate and fixed income cash management clients in over 100 countries and more than 240,000 users for its CitiDirect EB service, processed over 1 billion cash management transactions in 2005 and revenues grew by over $500 million in the past three years.
  
  
•  As the successful ICM banks continue to invest in people, systems, infrastructure and products the smaller and less proactive ICM banks are likely to fall behind and may eventually have to get out of the business.

Mission statements

Banks have been adding to the range and depth of their ICM services for many years. Recent examples include JP Morgan adding trade logistics and the payment of government benefits to its services. Almost all the banks now have some form of cross-border sweeping and concentration services, such as the Automated Common Concentration International Service from BNP Paribas, and the 50-plus global cash management services and 200-plus applications within Citigroup’s new TreasuryVision portal and EB delivery service.
 
To check the progress of this expansion in ICM services Euromoney asked 10 leading cash management banks to list the services they now include in their ICM offerings and state their missions in the business, (see figure 1).

The list of services the banks included not only reflects the areas they are focusing on, but also shows how dramatically the range of ICM services has expanded over the past decade. Almost all the banks now include trade services in their ICM offerings. Similarly, commercial cards are often an integrated part of the cash management range. The other major expansion of the ICM business has been into the optimization of supply chain management and all aspects of working capital.