Global and large multi-national corporations need global cash management solutions more than ever before as they optimise their business and cash flows world-wide. The Global Network Banks were supposed to provide complete global cash management solutions. However, in reality, there has never been a truly global bank, not even Citi as even they only have their own cash management branches in 100+ countries. All the so-called global network banks have always had huge gaps in their coverage even with partner banking. Nevertheless, they provided the most global coverage for MNCs and were easier to work with than going direct to local banks in each country.
But now the eight global network banks - Bank of America Merrill, Citi, Deutsche Bank, HSBC, JP Morgan, RBS, and Standard Chartered are down to seven as RBS is exiting the business, see. Not only this, all banks are ‘adjusting and rationalising their coverage’ to cope with the new normal, as:
- the regulatory controls increase, e.g. Barclays now has “an ever decreasing focus on international (except Africa which was hived off into a separate division” as the regulatory costs have made much of their international business unprofitable, Global Network Bank banks no longer cover significant regions themselves, such as Baltics, preferring to use partner banks
- banks are hit with huge fines from the regulators
- new technology costs of delivering international cash management services increases year by year
- shareholders demand higher returns, e.g. HSBC is not sure it will continue in several countries in Latin America
- competition increases as regional / local banks continue to improve their services, and non-banks continue to gain market share.
Banks rationalising their cash management services has always happened, but now it is much more severe and happening much faster. Today MNCs need to be prepared for their new normal in buying bank cash management services where banks are under severe pressures, as never before. Corporates need to be prepared for:
- banks not being able to give much notice of the service(s) being withdrawn, e.g. RBS adopting a new business model
- new regulations making a service unviable, e.g. for some banks Basel III is making notional pooling impossible, and the services being withdrawn
- the level and quality of service changing quickly due to competition and new technologies.
This is a new world where corporate treasury departments now need, more than ever, to minimise their exposure to their cash management banks.
Is partner banking the answer?
For many years the cash management banks have been hoping that partner banking would provide the solution to their lack of global and regional coverage. Carole Bernde, in her welcoming speech at last year’s Eurofinance’s International Conference in Budapest (when she was still at RBS), explored how banks will overcome the current situation, “Aspirations of global supremacy and one-stop corporate and investment banking shops are starting to give way to the reality of what is possible given the constraints of returns, regulations and resources. Banks are centring themselves on geographic and product areas of speciality; doing less, but doing it better. Not spreading themselves too thin.” (She must have known some of what was coming at RBS.)
Then she predicted a great future for partner banking, “Our new reality will see us each centre our expertise and partner more, to ensure the client's need for global banking is still delivered. These won't be the basic partnerships of the past, they will be truly integrated. We don't have to look further than the airline industry to see how this will play.” She suggested that these new partnerships should be like the airline alliances.
Over the five months since the Berndt’s speech there has been little evidence of any substantial change in the nature and quality of partner banking alliances. The problem with these alliances is, as one corporate treasurer put it recently, “In the detail, and much of the detail I don’t like.”
Although the cash management banks and the banking clubs are defintley improving their integration and joint services, it will be a while before they are acceptable to many corporate treasurers. So what to do in the mean time?
Managing cash management bank exposure by becoming as bank agnostic as possible
Corporate treasury departments have always used strategies to manage their bank concentration risk in the composition of their investments, in their credit providers and in their cash management services. Many of the strategies used today are the same, but what is changing rapidly is the balance and mix. Corporate strategies to be as bank agnostic as possible, include:
- setting up bank links and internal systems/structures so they can move banks quickly, e.g. Johnson Controls can move banks in two months, see. This is now much more important with many corporates following their example
- using technology, e.g. insisting on the use of ISO standards and rejection of bank proprietary standards internally and externally, and removal of banks not complying, e.g. Johnson Controls dropped a bank they had used for 30 years who could not comply
- using a regional bank or a global network bank plus SWIFT connections to local banks where needed
- having ‘dormant banks’ set up and ready just in case the lead bank pulls out or service level drops. This is seen as an increasingly cost-effective option as corporates understand the cost of ‘being left in the lurch’. At the recent ACT Cash Management Conference in the UK a senior group treasurer recommended having at least two banks/country and in some countries, e.g. China, having many more
- creating bulk payment files that, at the point of creating the file, the corporate decides which bank they are going to deliver them to, e.g. Omnicom Finance are actively pursuing this approach
- going direct to clearings wherever possible rather than through a specific bank, e.g. BACS in the UK and other countries are developing this model.
CTMfile take: Although becoming and remaining as bank agnostic as possible will be a vital strategy in many corporate treasury department’s operating model, it will also be important to remember that, as in any effective supply chain, all suppliers need TLC and that includes corporates’ banks.
- This item appears in the following sections:
- Cash & Liquidity Management
- Cash & Liquidity Management in Asia-Pacific
- Cash & Liquidity Management in Europe
- Cash & Liquidity Management in Latin America
- Cash & Liquidity Management in Middle East & Africa
- Cash & Liquidity Management in North America
- Global Cash & Liquidity Management
- Partner Banking & ICM Solutions