A rapid evolution of international cash management delivery is happening driven by the differing needs and pressures on the banks and their global/regional MNC corporate customers. Corporates with operations in many countries want to keep things simple in managing their cash and payments world-wide. However, the economics of the transaction banking and ICM business, and the regulatory pressures are ensuring that banks are ‘having to’ or ’choosing to’ withdraw from/cut their resources in many countries. Something has to change in corporate ICM solutions.
Pressures on banks and their evolving solutions
The regulatory compliance cost pressures on the cash management banks is growing remorselessly as Basel III, KYC and many other regulations bite. Not only this, the overall revenues in transaction banking business and cash management business are worsening, e.g. analytics company Coalition recorded a drop in transaction banking revenues from the 12 leading cash management banks for the first time since 2010 with revenues in the sector falling by six per cent in 2015, see.
It appears that John Read was right: the basic universal bank model doesn't work, so putting more pressure on the banks to change their business models.
The banks have had to react to these pressures and changes in the market. Some of the ‘adjustments’ over the last couple of years have included:
- RBS in 2015 withdrew from the global ICM business
- Barclays have announcemed that they intend to sell their African operations
- HSBC is in the process of withdrawing from parts of South America
- Global Network Banks are getting out of the retail banking business in the emerging countries, e.g. Citi in Latam
- banks are taking great care to stress that there has been no change to the cash management services even though their business model has changed dramatically, e.g. Deutsche Bank stressing that have they only exited one country - Argentina, whilst they have also increased their commitment to the global transaction banking business, see.
But corporates are also concerned about:
- the global network banks/regional banks, are, as a corporate treasurer put it, "spread awfuly thin", even if they are present
- the age of many banks systems infrastructure and processes
- the growing feeling in corporate treasury departments that the level and rate of innovation seems to be slowing with many new developments being mostly cosmetic
- increasing concern about how long lead banks can continue with their ICM coverage and services, and whether more 'adjustments' are coming.
As always, these bank criticisms are not completely fair or accurate, but they do show the level of concern among corporate treasury departments and their growing understanding of the fact that there is no such thing (and never really waS) such a thing as a global network bank, not even Citi, even though they have the widest coverage.
Needs and drivers of large MNCs
The problem for the cash management banks is that the ICM needs and drivers of large MNCs have NOT changed: they still prefer to have a single lead bank in as many countries as possible per region. Going direct to local banks is not an option for most large MNCs as the overhead of direct connection with all the different systems and standards in 100s of local banks is prohibitive, but they may have to.
Other problems for the large MNCs in the changing ICM landscape are that:
- they have found the small regional banks are not filling the vaccuum that the withdrawal of the network banks has created, often because their systems and services are "just not good enough" and so far behind technolgically
- bank supplier risk is growing as banks change strategic direction and can leave the corporate treasury department exposed, e.g. RBS's withdrawal, so corporates are having to take on more banks to protect themselves
- changing cash management banks is still one of the biggest tasks a corporate treasury department undertakes, which is why they are so reluctant to change.
The future: multi-bank and partner banking solutions
International Cash Management solutions are, and always will be, a cobbling together of multiple banks' and other suppliers' services. It is unlikely that any single organisation will ever provide a complete cash management solution for a corporate operating in many countries.
The main ICM solutions available today for the MNCs trading in many countries and regions include:
- global network banks + local banks and specialist service providers
- regional network banks + local banks and specialist service providers
- direct to local banks and specialist service providers (not what
As the network banks 'adjust' their ICM coverage and services, increasingly the ICM solutions will have to rely on some form of partner banking. The quality of the three types of partner banking - e-integrated partner bank, SLA partner bank and referred correspondent - is shown in the figure below.
Quality of the Types of ICM Solution
In the e-integrated partner bank solutions virtual accounts structures are playing an increasingly important role
Because there are such variations in the quality and consistency of SLA partner banking, some banks have joined together to form Banking Clubs with the aim of providing more consistent and integrated services and products. These banking clubs' SLAs can much more detailed and demanding than some bilateral SLAs. (For further discussion on Partner Banking and ICM solutions, see.)
CTMfile take: For corporates, the current market ICM transaction banking offerings are not ideal and it is going to become more difficult to find what they would ideally like. Partner banking has not been popular, but is it the only solution? Over the coming weeks CTMfile will be examining each of the options in more detail.
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