With European and North American companies doing more business than ever in emerging markets, there is increasing demand from banks for solutions, which enable them to support their clients internationally.
Banking clubs enable members to offer corporate customers – such as medium-sized companies with cross-border ambitions, especially in under-banked markets – access to local services in jurisdictions where their primary bank does not have a direct presence.
From the perspective of users, such arrangements are seen as preferable to forming bilateral agreements with local banks in individual countries.
For providers, few banks can justify owning their own network in a country unless they have scalable retail and mid-market businesses to support the cost of running technology, connecting to the local clearing systems and meeting local capital requirements.
Between them, the leading alliances – IBOS, Connector, TES, Unico and UniCash – cover a large swathe of the globe, although coverage is strongest in Europe and North America.
Unico is a Brussels-based network of eight European co-operative banks. UniCash is supported by 13 leading banks with a network of more than 40,000 branches across Europe. As of 2012, TES had the widest geographical reach of all banking clubs with members in 69 countries. Beyond Europe, Connector’s network covers Brazil, South Africa and Australia. IBOS has 13 member banks and 18 associate members.
Banking clubs are by no means limited to developing markets. A lot of the activity Irish lender Ulster Bank – which become a full member of IBOS two years ago – sees is on the inbound side, particularly for US companies locating in Ireland that are banked with US financial institutions that are not network banks.
Lisa Taggart, relationship director Ulster Bank Corporate & Institutional Banking, explains: “The clubs claim various specific benefits – Connector states that by having an account with a local member bank, companies can convert cross-border payments into domestic payments with an associated reduction in fees, while IBOS says companies can access FX services and facilities across Europe and the Americas through its network.”
Industry experts say it is vital that banking clubs extend their coverage.
Bernd Richter, an associate partner at business consultancy Capco, says: “UniCash, IBOS and Unico are more focused on Europe and the Americas. Connector and TES are starting to cover Asia Pacific and the Middle East, but still have more ground to cover to achieve significant coverage.”
Restrictions on overseas accounts in Latin America are just one reason why the banking club concept in the region is gaining traction, suggests Bob Lyddon, IBOS general secretary.
“Due to the nature of the local economy, a corporate is normally best advised to trade as a resident entity in Chile and Brazil, and the commercial restrictions are reflected in the banking offering that can be made available,” he says.
“Non-resident accounts are not permitted in Chile, although a resident can hold accounts in foreign currencies. In Brazil, foreign currency accounts are not available and it is onerous to operate a non-resident bank account in local currency.”
|Sepa: special focus|
In Europe, the Single Euro Payments Area (Sepa) has removed the requirement for non-resident accounts for local collections, which can now be achieved through a single account. However, this has not diminished the demand for banking clubs.
“While there is a trend towards centralization and the shared services model adopted by major corporations, it is noticeable that many medium-to-large companies remain quite decentralized,” says Lyddon.
“For a treasurer trying to set up banking remotely in a new country, the option of selecting a local bank in each country has declined due to the foreign beneficial ownership issue,” citing the KYC challenge for transaction bankers offering services to foreigners in de facto control of a given domestic organization without holding the ownership title.
He adds: “Additionally, the option of using a network bank may not be open to the treasurer if that bank has retrenched.”
As the larger network banks might have differing criteria for what type of customer and level of business they are willing to take on, Ulster Bank's Taggart says membership of a banking club ensures her customers can access full-service banking that is appropriate for their size and growth potential.
Capco’s Richter accepts that, to a certain extent, non-bank service providers such as Earthport – a cross-border payments service provider – have targeted some of the product and services spaces of banking clubs.
“However, from a banking club perspective, this could be seen either as a threat or an opportunity to cooperate with these innovators to enhance the existing banking club franchise,” he says.
One of the key elements in FX risk management for companies with multinational operations is cash pooling, which enables treasurers to transfer cash across borders and in different currencies.
“Cash pooling in general is done across borders, with services available at any point across the network,” explains Richter. “These services are a common part of the whole cash-management value chain, but are not dependent on the banking network itself.
“What is relevant are the available means for cash pooling and in which countries account and banking relationships are established.”
The ability to offer client-specific liquidity and cash-management structures across a set of countries and regions, combined with the ability for local cash collections and remittances, drives the value of banking clubs, he says, adding: “This enables their members to offer these services at a competitive pricing point to compete against large global network banks.”
Lyddon describes access to pooling services as a key selling point for banking clubs.
“Since 2000, IBOS has had a same-day value overnight cash pooling service [in EUR] that moves the entire available balance in the slave bank and transfers it to the master bank,” he explains.
“It is a commonly held misconception that banking clubs cannot offer cash pooling – we have more than 200 customers using this service.”