Cash management: banking’s gateway business
Transaction banking is entrenching its status as a leading – and profitable in its own right – business in the world of banking, helping to secure lucrative ancillary work for revenue-hungry banks.
The countercyclical nature of cash management makes it a perfect accompaniment to the more correlated trade-finance business, smoothing returns over the economic cycle.
Its champions also cherish the stickiness of the relationships GTS brings. Managing a corporate’s cash management embeds a bank within its fabric in a way that all but ensures a long-term business relationship.
|Matthew Davies, head of strategic relationships for GTS at BAML|
Banks that have not traditionally focused on transaction banking have been keen to build up their capabilities – but is the principal attraction being in the business itself, or do they see it as a gateway, a way to originate other businesses? Banks are characteristically tight-lipped on specifics. Deutsche, which is responsible for processing payments on iTunes, was well placed to benefit when Apple decided to make its inaugural bond issue, securing a place as bookrunner alongside Goldman Sachs. There is little doubt other lucrative ECM and DCM deals have been won off the back of GTS relationships.
“Banks may see it as a valuable entry point into a relationship,” says Nadine Lagarmitte, global head of payments and cash management for financial institutions at HSBC. “But there are challenges. You need scale to be globally competitive in this business, but the key is to be able to meet clients’ needs with solutions that are appropriate and suitable for them, and this varies across sectors.”
Kash Ahmad, MD and head of UK cash origination at Barclays, adds: “There has been an evolution in the way both banks and clients view banking relationships.”
Banks no longer only need to commit balance sheet to be seen as a key partner, he says. There is a greater appreciation of the less capital intensive but equally important relationships and solutions provided by the transaction bank.
It isn’t only the banks that have changed their view of transaction banking. “Before the financial crisis, corporates didn’t focus as much on the availability of cash or counterparty risk exposures,” says Richard King, head of UK corporate banking and DCM at Bank of America Merrill Lynch (BAML).
“Now these areas are seen as paramount, so the transaction-banking relationship is far more important to the treasurers and CFOs of our clients.”
|Richard King, head of UK corporate banking and DCM at BAML|
Client priorities have changed, says Ahmad. “Where once the focus was entirely on yield, now there is a greater appreciation of additional factors, such as security and accessibility. “If a client is looking to deposit money and the return is a few basis points less, that is one thing. But if there is a possibility of losing access to that money, then that has potentially more serious consequences.”
In some ways, banks view their transaction banking operations as they do their loan desks, which are also strategically vital for many banks wishing to nurture relationships with their clients. The crucial difference is profitability.
Bank loans are often viewed as a loss leader, or at least a marginally profitable business that is useful for securing more profitable mandates with other parts of the bank. Conversely, transaction banking is profitable enough to be worth doing in its own right.
Bankers deny that transaction banking can be a loss leader to originate business in other areas. “Pricing in this business is very much market driven, given the highly competitive nature of the market,” according to one GTS banker. “We want GTS to be profitable as a standalone business. We wouldn’t price it specifically to win business in other areas.”
For example, total combined revenues from payments and cash management (PCM), global trade and receivables finance, and securities services at HSBC hit $11.4 billion in 2012 – up 9% on a year earlier – with PCM generating that largest chunk at $6.2 billion. HSBC’s PCM business has recorded a compound annual growth rate of 15% since 2009.
|Chris Foskett, global head of treasury services sales at JPMorgan|
In addition, the transaction-banking relationship does open other doors. “The transaction-banking relationship gives you some insight, and allows you to potentially take a different view on a credit than you might otherwise,” says Ahmad. “It means you know them better and there are fewer chances for surprises.” As a trusted partner, almost part of the inner circle of the company’s management, the transaction bank has influence other banks usually won’t have, meaning ancillary opportunities that arise are more likely to be viewed favourably.
Transaction-banking relationships also give banks a unique perspective into their clients’ broader needs, paving the way for cross-selling opportunities.
“Liquidity management is so fundamental,” says Chris Foskett, global head of treasury services sales at JPMorgan. “Those discussions with the client invariably extend to dialogue about other business.”
However, in this business in particular, client satisfaction is somewhat asymmetric: a job well done is seen as business as usual, but any problems that arise are highly visible. However, this does not mean good service goes unnoticed.
That is a price worth paying for the proximity the transaction bank wins to the corporate treasurers and chief financial officers of clients, putting the bank in pole position to win ancillary business. The cross-selling opportunities extend across the full spectrum of the bank’s activities.
“We will always look to develop holistic solutions and cross-sell business with our cash-management clients, such as commercial cards and supply chain finance,” says Matthew Davies, head of strategic relationships for GTS at BAML.
“FX is clearly a natural fit, too, due to the transactional nature of the business, but there are further potential cross-selling opportunities in asset management and we have also seen our GTS business be an enabler for investment banking.”