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Foreign Exchange

International cash management review 2011

Banks are investing heavily in their cash management businesses, recognizing their importance both as a revenue generator and a means of strengthening customer relationships. <i>Euromoney</i>’s annual review surveys the state of the market. By Jack and Wolfi Large.

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.

Figure 1 - Use of partner banks/region

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.

Figure 2 - Variations in the quality of international cash management solutions 

Source: J&W Associates Copyright ©2011


When asked for their opinions on partner banking many of the immediate responses were very similar, ‘Hate it’, ‘Rubbish’, ‘It just doesn’t work’, ‘There is always going to be a lack of compatibility between two banks’. Clearly some have had poor experiences of partner banking. Some refuse to use it at all. Others were concerned about it inevitably leading to increased costs. Most of the treasurers agreed that international cash management services have improved in general over the past few years as the banks have made their systems and services easier to use, with more real-time reporting, and standardized documentation and legal contracts. Though they acknowledged improvements have been made, they all agreed that improvements in the integration and consistency of services across multiple countries and across the banks’ own branches and partner banks would impress them more.

Not all the corporate treasurers had the same mistrust of partner banking. Several expressed interest in wired partner banking and integrated partner banking solutions, particularly for countries in which they do small amounts of business and have simple banking requirements. Integrated partner banking is attractive because it eliminates the need to manage local bank relationships and helps minimize bank counterparty risk.

And there is some evidence of successful partner banking. A healthcare company operating in 20 countries in Europe, with no credit facility requirements locally, is using a combination of BofA Merrill Lynch own branches in nine countries and integrated partner banking in three others for its payments and collections, and liquidity management. Most of the payments and collections have been centralized into a shared service centre but the company still requires some local cash management functions. The central treasury has full visibility of all the company’s accounts and cash flows and control of all payments while local subsidiaries are able to access data and contact either the central BofA Merrill Lynch support team or the local bank for assistance, whichever they prefer.

If a company can simplify its legal and banking structures, does not require local credit facilities and has no local tax arrangements then it is possible to use just one integrated partner banking account per country. A global MNC in Europe has simplified its operations and cash flow by eliminating the use of petty cash, centralizing payroll, funding credit requirements from the in-house bank etc. It now has a single integrated partner banking account in several countries with all payments and receipts flowing through this account in each country - even in Hungary, where the company’s shared service centre is located. This solution, with the advanced payment referencing and mapping necessary to ensure the reconciliation of payments and receipts, has also been shown to work.

The quality of international cash management solutions has doubtless improved. Connectivity and processing integration, cut-off times, electronic banking integration, and the quality and consistency of services are all considerably better than they were five years ago. For simple and some quite complex banking arrangements partner banking has now been shown to work, but its success depends not only on the size and complexity of a company’s business but the quality and consistency of the international cash management solution. For many companies partner banking will never satisfy all their requirements and they will continue to deal with global, regional and local banks directly. As the quality of international cash management solutions continues to improve and as treasuries continue to simplify their operations and banking requirements, the role of partner banking in international cash management solutions will doubtless continue to grow but it is unlikely to be the panacea some banks claim.

The survey

The Euromoney 2011 survey of international cash management covers the services provided by the global network banks, leading cash management banks worldwide and the banking clubs (as above) and covers all five regions: Asia-Pacific, Europe, Latin America, Middle East and Africa, and North America.

Some 60 banks completed questionnaires on their cash management systems and services and the network coverage of their full service branches (own branches) and partner banks. The data from their responses is given in the tables. The tabular results are described in the following sections, which include a review of the global network banks and a description of the international cash management services banks offer in all five regions of the world. The introduction to each of the regions includes a summary of the main developments in the region in 2010 plus a comment from a leading cash management bank in the region.

For the purposes of the survey a full service branch (own branch) is defined as a branch which is fully owned by the bank, which provides lending, deposit-taking and payment services and which is fully electronically integrated into the bank‘s global network. A partner bank is a bank which is able to provide all the standard local transaction services, including same-day payments, automated clearing house services, paper clearings and cash services, with links between the lead and partner banks’ electronic banking services providing full money transfer services and end-of-day and intra-day reporting services. No distinctions are between the different types of partner banking arrangements.

Global network banks

The Euromoney survey of global network banks covers seven banks: Bank of America Merrill Lynch, Citi, Deutsche Bank, HSBC, JP Morgan, RBS and Standard Chartered Bank.

Although most of the banks have increased their transaction banking revenues significantly and are investing heavily in cash management and trade services, there have been only small improvements in the network coverage of just four of the banks, as shown in Figure 3.

Figure 3 - Changing balance of global network bank country coverage 

Source: Global network banks. Copyright© 2011 J&W Associates


Deutsche Bank has increased the number of countries covered by its own branches for the third year running, with the addition of two more in 2010. BofA Merrill Lynch added one to the number of countries covered by its own branches and one by a partner bank. Citi and Standard Chartered Bank both added one to the number of countries covered by their own branches. JP Morgan has been fine-tuning its network and RBS has continued to rationalize its network as part of a five-year strategic plan but still has significant coverage across the regions.

The survey results given in Table 2 show (please click here to download Table 2):

• Only five of the banks, Citi, Deutsche, HSBC, RBS and Standard Chartered, have their own bank branches in all five regions • Citi has by far the largest own branch network with branches in 92 countries; its closest rival HSBC has branches in 66 • Citi has the largest own branch and partner bank combined network covering 119 countries; its closest rival Standard Chartered Bank covers 93 followed by HSBC with 76 • Citi has the greatest access to paper clearings and same-day clearing systems with Standard Chartered Bank a close second • Citi also has the greatest access to ACHs, with HSBC next • All the other banks have far less coverage of paper clearings, same-day clearing systems and ACHs • Citi also has the lead in payment cards, issuing in 65 countries; HSBC is a close second with 60 and JP Morgan has 57 • Citi and JP Morgan acquire payment card transactions in 62 countries, but Deutsche Bank acquires payment card transactions in by far the greatest number of countries covered by its own branches at 39.

International cash management services in Europe

The Euromoney 2011 survey of banks offering international cash management services in Europe covers 20 banks: BofA Merrill Lynch, Barclays Bank, BBVA, BNP Paribas, Citi, Commerzbank, Danske, Deutsche Bank, HSBC, ING Bank, JP Morgan, KBC Bank, Nordea, Raffeisen Bank International, RBS, Santander, SEB, Société Générale, Standard Chartered and Unicredit.

The Single Euro Payments Area (SEPA) has dominated much of the European banks’ thinking and development, particularly since December 2010 when the European Central Bank announced possible end dates of 2012 for migration to SEPA Credit Transfers and 2013 to SEPA Direct Debits. The centralized collection of receivables will become very attractive if the pan-European SEPA Direct Debit becomes a reality. Basel III is having an impact, increasing the cost of borrowing and at the same time reducing the availability of liquidity, as authorities adopt stricter policies on lending practices. The other focus of banks in Europe has been on finding ways of releasing cash trapped in Eastern Europe, for example, ING can now include rouble accounts in its global multiple currency notional pool structure and can provide same-day funding of rouble local accounts held in Russia.

The pressures and opportunities for centralizing cash and treasury management in Europe are growing. ING’s Mark Buitenhek, global head of payments and cash management, believes "Clients are now focusing on how their banking partner can provide innovation in servicing. As clients have automated and centralized more, there is a high dependency on technology. Servicing needs to be swift and made easy in combining technology with personal contact."

The survey results for Europe given in Table 3 show (please click here to download Table 3):

• a variety of international cash management strategies for the region, from being an end-to-end provider of treasury solutions to being a world-class provider of cash management solutions • Only seven of the banks have their own branches in 10 or more countries in the eurozone; all the rest, except Standard Chartered, have combined own branch and partner bank coverage in at least nine • Coverage of the rest of Western Europe varies considerably • Unicredit has by far the highest coverage of Central and Eastern Europe with its own branches in 19 countries; its closest rival Société Générale is in 13 followed by Raffeisen Bank International with 12 • All 20 banks are direct members of the SEPA Credit Transfer scheme and the SEPA Direct Debit scheme • Mass disbursement and mass collection services are generally available across the region • Almost all the banks issue debit and credit cards, and there has been a significant increase in the number issuing prepaid cards • Payment card acquiring services are now available from 18 of the banks • Multilateral netting services are available from eight banks, covering many countries and currencies • Pan-European notional pooling services are available from all of the banks, the main difference is in the number of countries from which pools can be operated • Sweeping facilities are available from all of the banks, ING with the highest coverage in 48 countries, and most provide several locations for the master pool • On-line investment portals are available from all but three of the banks, with most offering only their own investment products • Only eight of the banks provide automated sweeps into money market funds, the number of funds available has increased again, with Citi now offering 148 and Santander 99 • International cash management services in other regions are available from all but two of the banks, using various combinations of their own branches, partner banks, banking clubs and correspondent banks • Local resident cash management specialists are available from all of the banks; Société Génerale has local specialists in 33 countries and ING in 28 • Customer service support is available during normal office hours, with only JP Morgan providing 24-hour support Monday to Friday.

International cash management services in North America

The Euromoney 2011 survey of international cash management services available in North America covers 12 banks: BofA Merrill Lynch, Bank of New York Mellon, BNP Paribas, Citi, Deutsche Bank, HSBC, JP Morgan, PNC, Royal Bank of Canada, RBS, Standard Chartered Bank and WellsFargo.

There have been two major trends in North America over the past year. The first is the increasing complexity of international payment processing as a consequence of various new regulatory requirements, particularly the anti-money laundering OFAC standards, as a result of which payments can now be delayed for financial institutions to await more details on the parties involved. The second is a significant increase in demand for international payments and cash management services from all corporate sectors, including mid-tier companies and SMEs, as companies have begun to expand aggressively into or source products from international markets.

One of the major challenges banks face in providing international cash management services, particularly for mid-tier companies and SMEs, is ensuring consistency of service delivery around the world. HSBC now provides electronic banking services, HSBCnet and HSBC Connect, to ensure consistency of experience worldwide. HSBC has also been simplifying the process of making foreign currency payments by introducing services such as AutoFX Convert, which enables multi-currency payments to be made from a home currency account then paid locally in the recipient’s country and local currency. "This type of service really helps our customers save money and time while adding a higher level of predictability internationally," says Michael Gallagher, EVP of payments and cash management for HSBC North America.

The survey results for North America given in Table 4 show: (please click here to download Table 4):

• A variety of international cash management strategies for the region, from optimizing cash flow to ensuring adequate liquidity and managing risk to being the leading provider of global working capital solutions • The number of branches in the banks’ networks varies considerably, WellsFargo has the largest with 9,000 and BofA Merrill Lynch 6,000-plus • Most of the banks provide cheque processing and lockbox facilities • Mass payment and collection services are generally available, but there is only limited availability of multilateral netting and payment card services • All of the banks provide sweeping services, but there is only limited availability of notional pooling services as this is not a practice generally used in North America • All but two of the banks have on-line investment portals with automated sweeps to money market funds, seven offering other financial institutions’ investment products as well as their own • All but one of the banks provide international cash management services in other regions • Deutsche Bank and Royal Bank of Canada are the only banks offering 24/7 customer service support in the region.

International cash management services in Latin America

The Euromoney 2011 survey of the international cash management services available in Latin America covers 10 banks: BofA Merrill Lynch, BBVA, Banco Bradesco, Banco Itaú, Citi, Deutsche Bank, HSBC, JP Morgan, RBS and Santander.

International cash management in Latin America is not easy due to the lack of advanced clearing systems and many restrictive regulations prohibiting cross-border cash pooling and other advanced cash management techniques but, driven by the growth in the Brazilian economy and foreign investment pouring into Latin America, it is steadily improving. The increasing number of ACHs, reduced cheque usage, improved SWIFT connectivity and visibility of cash, and less restrictive legislation are making international cash management and the operation of shared service centres considerably easier.

All the international cash management banks covering Latin America use a combination of their own branches and partner banks. It is clear that Brazil will continue to be the driving force for economic growth and improvements in cash management in the region and a growing number of international banks are opening branches there. BofA Merrill Lynch, which has been providing cash management and investment services throughout the region from its hub in Miami for many years, recently obtained a commercial banking licence in Brazil to expand its local services. Juan Pablo Cuevas, MD and sales executive, GTS, at BofA Merrill Lynch, believes, "There are real opportunities to bring the latest cash and treasury management techniques to Latin America, with Brazil as the model for the region, much like China is for Asia."

The survey results for Latin America given in Table 5 show: (please click here to download Table 5):

• A variety of international cash management strategies for the region, from focusing on global cash management solutions to helping clients to optimize their working capital and expand within Latin America and to other regions • Citi has its own branches in 22 countries, its nearest rival HSBC in 12 • Only four of the banks have a significant number of their own branches in the region: BBVA with 3,000-plus, Bradesco with 8,000, Itau with 5,000 and Santander with 5,500-plus • There is great variety in the provision of payment services, Citi has by far the widest coverage of 22 countries for its mass payment services and HSBC 12, with most of the other banks offering far less • Four of the banks provide multilateral netting services, Bradesco and RBS with the greatest country coverage • Notional pooling is only available from BofA Merrill Lynch and Citi • Sweeping services are available from several of the banks, Citi having by far the greatest coverage in 22 countries, its closest rival Bradesco in 12, and overnight sweeping is available in only a few countries • Six of the banks have investment portals but only Citi offers third-party investment products as well as its own • Five of the banks offer automated sweeping services into money market funds • All of the banks offer international cash management services in other regions • Customer service support is available during normal office hours.

International cash management services in Asia-Pacific

The Euromoney 2011 survey of the international cash management services available in the Asia-Pacific region covers 11 banks: Agricultural Bank of China, BofA Merrill Lynch, Bank of Communications, BNP Paribas, Citi, Deutsche Bank, HSBC, ICBC, JP Morgan, RBS and Standard Chartered Bank.

In the past 12 months the main developments in Asia-Pacific have been an increased momentum in the use of the renminbi for cross-border trade settlement and the continuing focus on improving liquidity management throughout the region. Small companies have been adopting large multinational corporation-type liquidity management practices to improve their working capital management and larger companies have begun to adopt the new eBAM standards as they automate more of their account management processes. And FX has become even more competitive, with a move to provide more transparency of rates and margins and the banks often quoting fixed spreads against a benchmark rate for cross-currency transactions.

Cheques are still used for business payments in the region and the banks continue to develop new cheque services to help clients improve their efficiency; for example, Standard Chartered Bank has launched a remote cheque printing service to enable the timely movement of goods and Positive Pay to minimize cheque fraud. At the same time developments in mobile phone banking and payment services have accelerated and over the next 12 months are likely to make further progress with the banks, telecommunication and card companies working together to launch a range of new services. The increase in the adoption of and the expansion in the use of the renminbi is set to continue in 2011 as is the drive to improve liquidity management. Ray Zabarte, global head for payables at Standard Chartered Bank, believes, "Banks must deliver best-in-class solutions catering to a spectrum of needs from RMB trade settlement to mobile banking. To be successful, banks need deep local market knowledge, solutions with transparency on transactions and pricing, and good relationships with regulators."

The survey results given in Table 6 show: (please click here to download Table 6):

• A variety of different international cash management strategies for the region, including providing comprehensive treasury solutions and qualified service for local and global clients, providing innovative and value-added international cash management solutions, providing international cash management solutions and becoming the core bank for their clients, and focusing on market share and profitability • Standard Chartered and HSBC have the widest country coverage with their own branches in 21 and 20 countries respectively; Citi is next with 18 • Standard Chartered Bank has the highest combined coverage of its own branch and partner bank countries with 47; Citi is next with 32 • Inside China, Agricultural Bank of China has by far the greatest number of branches with 24,000, next is ICBC with 16,000; outside China, Standard Chartered Bank has by far the greatest number of its own branches across the region, with more than 900 • Deutsche Bank has a combined total of its own and partner bank branches in the region of well over 94,000, which far exceeds any other bank’s coverage • Mass payment and collection services are provided in 20 or more countries by several of the banks • Many banks provide payment card issuing and acquiring services • Only four of the banks provide multilateral netting services • The difficulties of providing fully integrated international cash management services in the region are highlighted by the small number of countries covered by pooling and sweeping arrangements • Eight of the banks have investment portals and offer automated sweeps into money market funds • All but two of the banks offer international cash management services in other regions • HSBC and Standard Chartered Bank provide the greatest resident cash management specialist coverage in 20 countries • Resident cash management support and customer service offerings are all relatively similar, apart from opening hours with only JP Morgan offering 24/5 service support.

International cash management services in the Middle East and Africa

The Euromoney 2011 survey of the international cash management services available in the Middle East and Africa region covers eight banks: Barclays Bank, BNP Paribas, Citi, Deutsche Bank, HSBC, RBS, Standard Bank and Standard Chartered Bank.

The Middle East and Africa is the most difficult region for companies to carry out cash and liquidity management, with more socio-economic challenges and a greater lack of basic banking facilities than in any other region. Yet multinational corporations in the region continue to centralize their operations in shared service centres and introduce cash pooling wherever possible. Over the past 12 months they have also renewed their focus on improving receivables processing and reducing days sales outstanding. The most important banking initiative, particularly important for developing countries, has been the increase in the use of distributor financing to support the MNCs’ wholesale customers. Barclays has been particularly active in developing bespoke distributor financing structures in Africa.

Over the next 12 months if, as is hoped, the economies of the region begin to grow again, more developments and innovations in international cash management are predicted. The use of mobile phones for making and collecting payments, already important in some sectors, will continue to grow and the centralization of cash and liquidity management and focus on working capital management will also continue. For companies to succeed in the Middle East and Africa, Barclays Bank managing director of corporate banking Africa, Usman Ahmed, believes, "They will need to structure their cash management solutions so that they also facilitate working capital financing for their distributors, thereby positively impacting sales whilst managing receivables and payments."

The survey results for the Middle East and Africa given in Table 7 show: (please click here to download Table 7):

• A variety of different international cash management strategies for the region, including supporting customers in optimizing working capital, providing access to efficient local and global information, being the most admired and profitable transaction bank in the region, and providing a consolidated client offering • Barclays Bank has the largest branch network in three of the nine major countries, Egypt, Kenya and South Africa • Citi has the greatest country coverage of mass payment and collection services in 23 countries, with the next best coverage from Standard Chartered Bank • Multilateral netting services are available from four of the banks; Citi has the greatest country coverage • Notional pooling is available from all of the banks, with great variations in the number of locations where a pool can be situated and the number of currencies covered • Sweeping services are available from all of the banks but only BNP Paribas, Citi and Standard Chartered provide facilities in a large number of countries • All of the banks provide international cash management services in other regions • Offshore banking services in Seychelles or Mauritius are provided by five of the banks • The number of countries in which the banks have resident cash management specialists varies from two to 23 • Customer service is available in normal business hours.

Future

Pierre Ferzstand, global head of cash management at BNP Paribas, believes, "The traditional distinction between cash, liquidity, working capital and supply chain management is blurring," and the bank’s remit is changing. "We are having to provide a much more holistic approach to cash and treasury management." The same is true for corporate treasurers around the world. In 2011 they will need to focus on ensuring adequate liquidity, optimizing cash flows and working capital management not only throughout their own companies but in their supply chains as well.

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