Over the past 12 months, recognizing the value of cash management for recurring revenues and its importance in developing relationships with their corporate clients, banks have been investing heavily in their cash management services. Success in the cash management business requires significant and continuous investment - in people, infrastructure and services. Banks unable to afford the level of investment required are becoming increasingly dependent on white-labelling other banks’ cash management services or using third-party services. And recently more of the banks’ CEOs have begun to show unprecedented interest and involvement in, and commitment to, the cash management business. Baudoin Prot, BNP Paribas chief executive, gave the welcoming address at the bank’s Cash Management University autumn event for corporate clients last year, clearly demonstrating his personal commitment to the business.
Optimizing working capital
Many of the banks are now focusing on expanding their cash management products and services to enable corporate clients to optimize their working capital, as shown by the following statements:
• Dub Newman, head of global treasury sales at Bank of America Merrill Lynch: "In today’s volatile global economies, clients want a bank that can help them optimize working capital, providing visibility into cash positions and required investment and funding solutions."
• Rajesh Mehta, Citi’s MD of treasury and trade solutions, EMEA: "Following the recent crisis and as companies go global, treasurers have been strategically engaging across their business to ensure financially sustainable and efficient business practices, sufficient access to liquidity, stable and robust supply chains, and appropriate risk and working capital management."
• Tim Fitzpatrick, HSBC’s head of payments and cash management: "Cash management is becoming increasingly focused on liquidity management. Treasurers are working ever harder to optimize working capital to ensure maximum availability of cash, whilst focusing on counterparty risk. In Europe in particular, the payments infrastructure is changing and regulation is rapidly increasing."
• Diane Quinn, global corporate segment executive, JP Morgan Treasury Services: "Payments and collections continue to become commoditized. Product bundling to unlock cash across procurement, human resources, supply chain offices as well as treasury is where the real value can be realized."
• Maurice Cleaves, the new global head of cash management at Barclays Corporate: "Cash management has become the optimization of group working capital, intra-day cash position management, supported by automated integrated transactional and reconciliation services."
But, whatever they may say, the banks’ international cash management solutions will ultimately be judged on delivery.
Partner banking
No single bank has branches covering the entire world, nor even an entire region, apart from North America. They all use a combination of their own bank branches and partner banks to provide comprehensive international cash management solutions. The levels of partner banking they use vary considerably between banks and also between regions. The reliance of the global network banks on partner banking varies considerably; for example, 60% of BofA Merrill Lynch’s international cash management network is provided by partner banks, compared to only 13% of HSBC’s. The levels of partner banking required to provide regional cash management solutions also vary considerably, from almost 60% in Central and Eastern Europe to 25% in the Middle East and Africa, as shown in Figure 1.
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Figure 1 - Use of partner banks/region |
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Source: Cash management banks. Copyright© 2011 J&W Associates |
There are basically three types of partner banking arrangements in use:
• Service level agreement (SLA) partner banking, which involves local banks providing cash management and payment services to agreed standards for a lead cash management bank and requires corporate clients to open accounts directly with the local banks.
• Wired partner banking, which again involves local banks providing cash management and payment services to agreed service level standards but the lead cash management bank and the local banks have integrated back office systems enabling corporate clients to instantly view their accounts in all the banks. This type of partner banking arrangement also requires corporate clients to open accounts directly with the local banks.
• Integrated partner banking, which also involves local banks providing cash management payment services to agreed service level standards and also requires back office integration, often at the same level as wired partner banking, but the lead bank uses nostro accounts with its partner banks to transact its clients’ services. Corporate clients are required only to have accounts with their lead cash management bank. This type of partner banking is also known as virtual banking, nostro account partner banking and network extension.
There are great variations in the quality and consistency of partner banking, so some banks have joined together to form banking clubs to offer integrated services and products using very detailed and highly demanding SLAs. The four clubs provide extensive coverage, as shown in Table 1 (please click here to download Table 1). The TES Banking Club has the largest country coverage (74) and the most member banks (76). Only two of the clubs provide coverage in all five regions of the world. In Connector, although the number of member banks has not grown in 2010, the networks of some of its member banks have, adding four countries and more than 11,000 branches. In IBOS member banks in six new countries in Central and Eastern Europe became fully operational in 2010 and it added six countries to its daily automated cross-border zero-balancing service. IBOS also added seven new banks to the network in Latin America.
The role of partner banking in international cash management solutions
The main components of an international cash management solution are electronic banking, payment and collection services, liquidity management services and customer services. The quality of a solution is determined by the range, depth and consistency of the services it offers as well as the level of integration between lead and partner banks. This can vary widely, as shown in Figure 2.
Companies have very different international cash management requirements depending on the complexity and nature of their business, legal and business structures, cash flows and whether or not the company is cash rich. There is clearly no one-fits-all solution. In discussions with a dozen experienced and knowledgeable corporate treasurers of regional and global multinational corporations some interesting opinions were expressed.
