Stickiness of transaction banking relationships being put to test
Banks have long appreciated the stickiness of their transaction services clients, with many of the most established players in the business having relationships that date back for several decades – but this can only last so long.
Intense competition among banks for new corporate business, as well as moves to make it easier for clients to switch banks, is making movement more fluid.
Large companies and financial institutions tend to have more than one cash management bank anyway, but most do review these relationships every year. According to Euromoney's annual cash management survey 2013, more than half of respondents said they had re-evaluated their cash manager relationship in the last 12 months.
While more than half of respondents said they did not intend to change the number of cash management providers, more than 10% said they did plan to while over 6% said they would cut back, according to Euromoney’s benchmark survey.
There are two reasons why clients have traditionally found it difficult to move between banks, says Matthew Davies, head of strategic solution delivery for global transaction services (GTS) EMEA, at Bank of America Merrill Lynch.
The first, he says, is the sheer quantity of documentation involved in moving and the fear of administrative complications arising during the switch. The second, he adds, is the technology interface between the client and the bank, which is often proprietary and can mean an overhaul of clients’ systems to be compatible with the new bank.
However, Davies says both of these factors have been changing in recent years. SwiftNet, ISO XML standardization and the various eBAM (electronic bank account management) initiatives were designed to help companies simplify their infrastructure and the process for switching providers.
Swift’s eBAM mirrors the UK Payments Council’s efforts at the retail level. It covers the electronic opening, maintenance and closing of accounts, and the reporting on account and mandate structures, according to Swift.
It consists of a set of 15 ISO 20022 XML messages to capture standardized eBAM information that needs to be exchanged between banks and corporates. This should ease the documentary burden and make different bank technology systems more compatible.
“[Paradoxically] ISO 20022 is going to increase competition but will also increase the stickiness of corporate banking relationships,” says David Sayer, global head of banking at KPMG.
Although it will make it easier to move and increase transparency, by providing better data and analysis of its service, it should also increase client satisfaction, he predicts. “If banks handle it well they will be able to attract and keep more customers,” he says.
In fact, Nadine Lagarmitte, global head of payments and cash management for financial institutions at HSBC, says transaction banking is “a highly competitive market with many local and regional players”.
Sayer adds: “Corporates have plenty of choice, with many banks offering their services either globally or regionally. If you go down to the level of products like letters of credit there are even more players.”
Lagarmitte says: “Customers have the ability to issue an RFP whenever they see fit. Typically they may review their arrangements every few years, although it’s a significant piece of work for a company to undertake.
“The client will appoint a bank based on factors such as service, balance-sheet sufficiency to meet their needs in managing liquidity, or counterparty strength, depending on their specific requirements. While pricing is one element of the mix, it’s part of a broader selection criteria.”
Even the smaller corporates should have dedicated treasurers and CFOs who can be assumed to be sophisticated enough to assess the value of their bank relationships.
However, Sayer acknowledges the issue does look more problematic the further you go down the capitalization scale, until you get to self-employed, single-person companies, which are essentially retail.
Banks do not take the stickiness of their GTS relationships for granted, and “constantly need to be offering corporate clients new solutions and services to encourage stickiness through longer-term relationships,” says Kash Ahmad, managing director and head of UK cash origination at Barclays.
With echoes of initiatives in the retail banking market, banks have developed systems to take the hassle out of moving their corporate account to ensure there are no reconciliation or cashflow issues arising from suppliers using an old bank account.
The bigger players will always have an advantage in GTS because it is a volume business and unit costs decline the more business a bank does. And this ensures the leading banks will always be dominant, and are likely to hold on to their most profitable relationships.
Yet “banks that focus on customers can attract premium pricing”, says Sayer. “Just look around Sibos, there are plenty of small banks and niche players out there.
“There are plenty of ways to play this business, and with the emergence of apps and new technology there is always the prospect of more players coming into the market.”