Shifting boundaries in transaction banking
In the world of transaction banking, relationships have a tendency to be long term. While some companies routinely issue a request for proposal every four or five years, others choose to stay with the same providers for much longer, in some cases spanning a number of decades.
However, their long-term tenure does not mean that the nature of these relationships remains the same over time. In recent years, a number of dynamics have been shaping the relationships between banks and corporates, leading to a shift in parameters and opening up new opportunities for collaboration.
As the role of the corporate treasurer has evolved, treasurers have taken on a more strategic role within their organizations. In turn, this has led to changes in their requirements from transaction banks.
|Maha El Dimachki, head of corporate sales, GTS EMEA at BAML|
“The expectation within the wider organization is that the treasury function is no longer purely operational and day-to-day,” says Maha El Dimachki, head of corporate sales, GTS EMEA at Bank of America Merrill Lynch (BAML). “It is incumbent upon banks to develop solutions that support treasurers in this increasingly strategic role.” At the same time, treasurers continue to find they have to achieve more with fewer staff. Triggered several years ago by the financial crisis, this squeeze on treasury headcounts continues to take effect. The 2013 Treasury Benchmarking Program survey, published in September by the Association for Financial Professionals, found that corporate treasury departments have an average of four full-time equivalents per $1 billion of annual revenue – down from 4.35 in 2012.
Meanwhile, as the core products and services offered by transaction banks have become commoditized, there is a growing need for banks to differentiate themselves. Many have worked to achieve this by offering value-adding advisory services.
|Jonathan Chesebrough, managing director, corporate advisory, at RBS|
“If banks want to make themselves more relevant to clients – or at least maintain that relevance – advisory is a great way to do it,” says Jonathan Chesebrough, managing director, corporate advisory, at RBS. As a result of these factors, the parameters of the relationship between banks and corporates have been gradually shifting in the past few years. Banks are looking to augment their relationships with corporations by taking on an advisory role, rather than simply selling products.
“We connect with other lines of business and consider the various areas and dynamics that clients need to address in order to develop holistic solutions that help achieve their desired end results,” says BAML’s Dimachki.
In particular, banks are able to offer their corporate clients support on projects that are typically regarded as in-house initiatives, such as setting up an in-house bank, shared service centre or payment factory. In the past, corporates might have turned to consultancy firms for external input on these projects.
Regulation is another area in which banks are playing a more advisory role. “With changes in regulation, such as the late payments directive, banks are playing a greater role in helping companies understand the changes and how things like supply chain finance might help them to pay suppliers more quickly,” says RBS’s Chesebrough.
He adds that clients are also particularly focused on understanding regulatory changes in markets such as China and India, and welcome any information that banks can provide on these topics.
Yet the object of the exercise is not just to provide information – more value can be added if this information can be used in relation to a company’s specific needs and objectives. Chesebrough says RBS has worked with clients that are considering moving into China, reviewing companies’ relevant cash flows and business processes in the context of local regulations, and using this as a basis to propose solutions in the market.
However, while taking on a more advisory role gives banks the opportunity to differentiate themselves and expand the scope of their corporate relationships, this shift also brings with it certain challenges. For one thing, banks need to have the right resources in place to fulfil this type of role.
“In our case, we’ve hired individuals who have worked within the treasury function or at consultancy firms to work with our clients to help deliver on their strategy,” says Dimachki.
However, with the parameters of the corporate-bank relationship continuing to shift, it is important that both parties understand the extent to which banks can advise their clients, as well as the inevitable limitations. For example, while banks are able to offer input on a wide range of topics, corporates will still need to seek advice from experts on tax and legal issues.