International cash management banks adapt to a tough new world
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International cash management banks adapt to a tough new world

Cash management banks are having to adapt their business models to face tough economic realities, regulatory imperatives, technological innovations and the ever-growing expectations of their clients, writes Laurence Neville.

Banks active in international cash management face numerous challenges. The moribund economic climate in much of the developed world means that uncertainty prevails: as a result, both clients and banks are cautious about investing. At the same time, the need for investment continues to grow: banking is in the middle of a profound – and costly – regulatory upheaval while the pace of technological innovation has accelerated.

“The background of continued economic uncertainty has brought many changes to transaction banks and the clients they serve,” says Karin Flinspach, EMEA head of payments and receivables at Citi Transaction Services. “The three years leading to 2012 were extremely tough,” agrees Carole Berndt, head of global transaction services at Bank of America Merrill Lynch. “Crisis became business as usual. At corporates and banks, our agility and ability to manage uncertainty increased exponentially and, by necessity, adapted and became more resilient.”

According to Michael Spiegel, global head of trade finance and cash management, corporates, global transaction banking at Deutsche Bank, treasurers are looking for three elements with respect to cash management. “These are greater visibility of global cash positions, improved cash control and easy access to a range of investment management options and solutions. The common theme is that they allow treasurers to optimize available resources and decrease dependency on external sources of funding. As market uncertainty continues, the need for visibility, control and alternative cash and liquidity management options will only intensify.” His colleague Shahrokh Moinian, global head, corporate cash management committee, global transaction banking, adds: “Corporate treasurers are eager to take the treasury function to the next level by adding value and increasing efficiencies.”

Berndt agrees that continued uncertainty means that corporates continue to take a back-to-basics approach to cash management. “There is a focus on transparent cash and risk management: knowing where money is; having the tools and processes in place that allow it to be moved quickly in different currencies and across different geographies; and monitoring day-to-day, or even hour-by-hour, positions,” she says. “Today’s treasurer has to do more with less, so technology that automates procedures and processes, and frees up precious time and resources, is essential.”

The uncertain economic backdrop is leading many corporates to increase their focus on internal efficiencies and cost reduction, with corporates pursuing standardization and centralization to achieve these aims, according to Flinspach,. “Clients operating centralized shared service centres (SSCs) are seeking to include additional functions within them,” she notes. In the past year there has been an increased focus by corporates with SSCs on incorporating procurement and human resources-related processes, such as payroll activities, into them. As centralization continues, the demand for standardized solutions across markets and products has increased. “Against this background, clients with decentralized operations are seeking to achieve efficiencies in cash management by rationalizing bank partners and technology infrastructures,” adds Flinspach.

According to George Nast, global head of products, transaction banking, at Standard Chartered, the concerns and behaviour of corporates differed markedly during different periods of 2012 and also differed according to the region in which companies where based. “In the earlier part of the year, corporates prepared for an uncertain economic outlook by shoring up their cash holdings,” he says. “This was especially the case for US and European treasurers who had risk management and the security of their cash as a top priority. Asia Pacific treasurers’ key considerations were liquidity and risk. Asia's growth, albeit slowing, was still stronger than the US and Europe. Therefore Asian corporates placed a stronger emphasis on having ready access to their cash for expansionary purposes. In the second half of the year, there was an increased focus on operational efficiency, such as optimizing liquidity, and a strategic review of corporates’ bank counterparty risk standing given the ratings changes of major cash management banks.”

Berndt says that the gradual improvement in the global economy – from the perspective of Western firms – over the past 12 months has shifted the focus of many corporate treasuries, with firms seeking opportunities to capitalize on their strengths and grow their businesses. “It’s a shift to a risk-aware rather than risk-averse approach, and this brought cash management into the spotlight in a new way,” she says. “Treasurers [have been] asked to support these development plans by having systems and processes in place that are scalable and efficient, to allow executives to take strategic decisions on how and where to deploy their cash.”

Regulatory change

Diane Reyes, global head of payments and cash management at HSBC, says that the regulatory landscape has changed forever. “Banks need to embrace the new world,” she notes. “The pace of regulatory change means that banks need not only to ensure swift compliance, but [also deliver] a seamless experience for clients. Regulation will also bring competitive pressures as regulators establish tougher operational risk, capital and liquidity requirements – a potential advantage to non-bank competitors.”

Kevin Brown, global head of transaction services at RBS, notes that increased regulation and compliance requirements are occurring at a global level (such as Basel III) and a regional and domestic level (such as Dodd-Frank in the US and the European Union’s European Market Infrastructure Regulation Directive). “It means that the banks have to adapt their offerings to remain compliant and ensure that clients can operate in this new environment,” says Brown. “Clients are also looking to their bank to provide insight and guidance on what the new regulation means for them.”

One specific regulatory change that will have major implications for the broader market is the announcement of a migration date to the Single Euro Payment Area (SEPA) – a long-awaited and welcome development, according to Citi’s Flinspach. “This has brought focus for market participants while creating challenges for many banks and organizations to prepare themselves for the move to SEPA prior to the February 2014 date.”

John Gibbons, head of treasury services in EMEA at JP Morgan, agrees that SEPA will have a significant impact on cash management in 2013. “European corporates are preparing for the most significant change to the European payment landscape since the start of the euro,” he notes. “In spite of recent turmoil, the euro remains a vital trading, investment and reserve currency for our clients all over the world. Transaction banks in Europe are proactively advising organizations on how to take full advantage of the migration.” (For more details see the payment systems review.)

Another crucial regulatory change, which creates huge opportunities for corporates and transaction banks – and could come to be seen as a seminal moment for the global financial system – is the emergence of the Chinese renminbi as a global trading currency and liberalization of China’s currency controls. “Last year saw the first batch of corporates utilize previously trapped renminbi and US dollars in China for lending offshore to related entities,” notes Nast at Standard Chartered. “Given China’s economic position in the world, [liberalization] will have wide-ranging implications and opportunities for the treasury and cash management practices of any corporate or institution with business dealings with China.”

Flinspach says that the opening up of China is already prompting market participants to embed capabilities to support renminbi cash management services. “This market change and the availability of new renminbi services are driving organizations to consider amending their existing cash management structures to facilitate their renminbi-denominated trade,” she adds.

Technology and changing bank relationships

In technology, the past year has seen a steady rise in the adoption of XML, partly as a result of SEPA (for which is it the default standard) but also as a standard for bank-agnostic messaging and for use in enterprise resource planning (ERP) and treasury management systems (TMS). “Across sectors, many organizations are seeking to implement XML as a global messaging standard,” says Flinspach at Citi. “As organizations seek standardization and flexibility within their internal systems and also externally with their bank partners, XML is proving attractive to streamline information management and communication.”

While technology is undoubtedly a crucial element in achieving treasurers’ goals, it is not enough on its own, according to Bank of America Merrill Lynch’s Berndt. “Technology can enable control, efficiency and risk management, but without a trusted relationship with your bank or your banker it adds little value,” she explains. “Corporates need extra resources and value banking partners that have deep and experienced teams they can call on to offer insight and expertise. We’ve seen first hand that close cooperation can yield real results and advice, information and a true consultancy service are what treasurers seek over and above pure product solutions.”

Berndt says that the unfolding of the eurozone crisis is a good example of the need for both technology and a close relationship. “Treasurers have had to revisit their cash management processes to ensure they are adequately prepared for any changes that might arise, and they have looked to their banks for up-to-date information and advice on contingency planning,” she says. “At the same time, we’ve had the prospect of new European and global regulations coming into force and corporates have looked to their banks for support on what this means for how they do business. It’s no longer just about what cash management products can be plugged in, but rather the quality of the relationship corporates develop with their banks and the advice and information they receive as part of this close and valuable collaboration.”

However, while corporates may be seeking to deepen their relationship with their chosen banks, they are also seeking to implement more flexible and adaptable configurations with their banking partners, according to Flinspach. “As a result, there has been a move in recent years away from proprietary connectivity and file formats towards bank-agnostic solutions such as SWIFT and XML. This trend will continue as corporates continue to seek solutions which give them the flexibility to work with several banking partners, while reducing costs associated with bank integration and bank counterparty risk.”

Investment priorities

All transaction banks have ongoing investment commitments that reflect the broader strategic ambitions of the bank. For example, Nast at Standard Chartered says that the bank aims to “deliver cash management solutions to our clients that significantly improve their ability to better manage working capital. Over the next five years, clients will be able to access industry-leading capabilities across liquidity management and account services, payments, collections and global billing solutions on standardized platforms.” Similarly, Maurice Cleaves, global head of cash management at Barclays, notes that: “Over the past year, we have placed our emphasis on driving efficiency through streamlined connections across our operations, to ensure our franchise meets the needs of our corporate clients.”

Pierre Fersztand, global head of BNP Paribas cash management, defines the bank’s investment priorities in terms of five main pillars. “The first pillar is a strong focus on developing new services,” he says. Investment from this pillar will result, in March this year, in the completion of BNP Paribas’s electronic banking service. The second pillar aims to harmonize the bank’s various client offerings, such as reporting and account opening processes, and leverage global tools.

BNP Paribas’s third pillar is flexibility. “Because ‘one size does not fit all’, we invest a lot in our connectivity hub in order to make it adaptable to different formats and reporting methods,” explains Fersztand. “The fourth pillar leverages our local capabilities, meaning we adopt the mind-set of a local bank. Wherever possible, BNP Paribas undertakes dealings with local payments and local people, rather than relying on a strategic partner. Priority is given to having local teams that speak the local language.”

While ongoing investment reflects the strategic goals of transaction banks, inevitably there are also specific investments – often driven by regulations – that are significant in any given year. “Our fifth pillar gives priority to SEPA and enables us to offer platforms that are able to handle huge volumes of payments and assist our clients through integration and format conversion tools,” says Fersztand. Similarly, Markus Straußfeld, head of international cash management sales at UniCredit, says that “given the demand to fulfil SEPA [our] focus has clearly been on Europe”.

SEPA has also been a priority at Bank of America Merrill Lynch: “We’re bullish on SEPA and believe that it offers significant opportunities in terms of creating greater payment efficiencies and lowering barriers between countries that will allow easier access to new markets,” says Berndt. “However many of our corporate clients still have much work to do in order to meet the migration deadline. Much of our focus is therefore on educating them about SEPA, creating a better understanding of the challenges and operational details that lie ahead, and guiding them through the migration process so that an end-of-year bottleneck is avoided.”

Flinspach at Citi says that investment in SEPA infrastructure will be an ongoing priority. “In Europe, we have been investing in our SEPA infrastructure for many years and we continue to do so,” she notes. “While 1 February 2014 is called the ‘end date’ to SEPA, this is truly only the beginning as SEPA schemes represent the future of payments and collections across Europe.”

Citi has also focused its investment on a number of technological innovations. “We’ve made significant investments in real-time payment infrastructures and capabilities,” says Flinspach. “Real-time payment systems are being driven by the availability of new technology, consumer demand and a cycle of market changes and we believe these capabilities will become increasingly relevant to our clients in the future.”

Other areas to benefit from Citi’s investment include reporting and reconciliation tools. “These capabilities enable our clients to automate their processes and achieve higher straight-through reconciliation rates, thereby supporting their drive towards cost reduction and efficiency,” says Flinspach. “Finally, we continue to invest in the mobile-enablement of our core platforms: with the increasing penetration of mobile, the rise of tablets and other mobile business units, our clients want greater visibility as well as instantaneous and on-the-go access to data. To that effect, we are developing convenient and flexible solutions that can meet these needs.”

Deutsche Bank has long been committed to investing in innovation. “The past 12 months have seen our efforts focus on working across business lines to improve the user experience while enhancing capabilities – and this has culminated in the creation of the Autobahn App Market,” explains Spiegel. “Developed in close collaboration with clients, the Autobahn App Market offers feature-rich functionality through an intuitive interface, along with a degree of customization capabilities. This allows treasurers to choose the apps most relevant to the specific needs of their organizations, and group and present them in a way that best suits their work patterns. As a result, it is a primary example of how we are working to streamline the way we deliver bespoke solutions, and increase internal collaboration to develop powerful, cohesive client solutions.”

Geographical expansion and partnering

Euromoney’s international cash management survey, based on responses from 27 banks globally, shows that no bank can use its own network in every country in the world to service its clients. Even Citi, which has the largest number of countries with fully integrated full service branches (88), must bolster its network with partner banks (see table 3). A total of 20 countries are covered by partners that have electronically integrated their back office with Citi to offer a seamless service; three countries are provided by banks that have simply signed a service level agreements (SLAs), which requires them to provide a specific service to an agreed standard (see figure 1 for global network banks’ use of partner banks).

The economic challenges facing banks are starkly displayed in this year’s survey. The results show that with the exception of Citi and JP Morgan (both of which had the same number of countries with full service branches as in last year’s survey), all the global network banks decreased the number of countries where they offer branches. Moreover, there is little evidence that operations in one country are being closed to enable another country to open: instead most banks are scaling back their global presence – even as customers say they increasingly want globally consistent solutions.

The most obvious exception to this trend is Citi, which is the only bank that has increased its in-country presence in almost every category (see table 3), ranging from direct access to local paper-based clearing to fully automated direct access to ACH. “Clients are increasingly looking for an extensive bank branch network,” explains Flinspach. “As clients centralize their operational processes, such as accounts payable and accounts receivable, they are seeking global bank partners that can help them rationalize and streamline their operations to gain efficiency and scale. As a result, they want to reduce their reliance on local bank providers, and shift to larger banks that can support their transition to a centralized structure while ensuring that their payment and collection requirements are met”

In most cases, banks are filling the gap caused by slimmed down in-country operations with partner banks. According to the survey, they are increasingly choosing to integrate their partners electronically into their back offices – effectively extending their full capabilities to that country in a cost-effective way: Bank of America Merrill Lynch, BNP Paribas, Citi and Standard Chartered increased the number of e-integrated partner banks, with Citi rising from one in last year’s survey to 20 this year. The use of partner banks – and the prevalence of e-integration – varies more widely in relation to payment clearing systems and services.

Other standout results from the survey include a massive increase in the number of countries where Bank of America Merrill Lynch issues payment cards locally and strong increases from many banks in the number of countries where payment card transaction acquiring is offered. BNP Paribas and JP Morgan in particular have increased dramatically the number of countries where they issue payment cards locally and offer card transaction acquiring.

A changing relationship

The pressure to offer a seamless service has “fundamentally changed” how banks work with each other, according to Berndt at Bank of America Merrill Lynch. “Interbank relationships have always been finely balanced, given that we are both competitors and collaborators –collaboration and cooperation are the modern-day buzz-words. Corporates operate multi-regionally and have increasingly sophisticated needs. They also have an inherent concern about the cost of banking. A bank that attempts to do too much in too many places is going to have a higher cost of banking to pass on to its client base.”

Delivering comprehensive, cost-effective, solutions in this environment therefore requires collaboration between banks, according to Berndt. “To make this work and ensure mutual success, the client and all parties involved have to invest in making it a transparent, open and honest working partnership,” she notes. Advances in technology have facilitated this collaboration and today multi-bank platforms can integrate different file types more easily, which, when delivered correctly, create a seamless client experience.”

Ravindra Madduri, head of propositions, global cash management at Barclays, says that as part of its pan-EMEA expansion strategy, Barclays is building strong and service-integrated relationships with fewer partner banks, in countries where it does not have a local presence. “This has led to the formation of ‘trusted’, long-term relationships with banks in the Nordics as well as across many CEE countries,” he says. “We recognize that our corporate clients need to feel comfortable about the strength of the banks which their main providers of services partner with. They must have confidence in our ability and our partner banks’ ability to complete transactions successfully and effectively. It is also important to offer some form of harmonization to clients – we believe the more relationships you have, the lower the level of harmonization.”

This article was originally published in The 2013 guide to Technology in Treasury Management.

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