- News & comment
Transaction banking: the shared future
Publication date: 15 March 2011
Tagged with: Anthony Richter, Bank of America Merrill Lynch, Banking, Barclays Corporate, BNY Mellon Treasury Services, Carole Berndt, Daniel Schmand, Deutsche Bank, Dominic Broom, HSBC, Lars Millberg, Ravindra Mdduri, SEB Merchant Banking, Transaction Banking
From Basel III to SEPA, credit availability, counterparty concerns and regional versus global capabilities – transaction banking has never been of so much interest to so many. Industry leaders discuss trends, challenges and opportunities for the transaction banks and their clients in 2011.
Over the past three years, whether as a result of the Lehman collapse and ensuing turmoil, or a development of underlying trends which were largely overshadowed by the global downturn, there has been a distinct sea change in transaction banking. A change for the better – a change to a more sustainable model for all. No longer are the myriad challenges facing the treasurer – efficient cash and liquidity management, risk management and reporting to name but a few – viewed as individual issues to be targeted by banks with a tactical response.
No longer is proprietary technology and clever product packaging the key to winning business. No longer is ‘client experience’ a phrase that can only be found in the pages of marketing literature.
Today, bank solutions form part of comprehensive strategy to deliver efficiencies across the treasurer’s organisation through an integrated approach that fundamentally revolves around a clearer and deeper understanding of corporate needs. Relationships have returned to the fore with an increasingly symbiotic feel – both among corporates and banks as well as partner bank collaborations.
Cynics will of course argue that with industry standards and regulation shaping the banks into broadly similar entities, relationship is one of the only differentiators that the banks still have available to them. But as our panel of experts discusses in this debate, even if that is the case, that doesn’t make the relationships any less meaningful or fruitful. How the banks add value to those relationships is what really matters.
While technology has taken a back seat from being a major differentiator – corporates increasingly want standardised solutions that provide high levels of integration and therefore STP and efficiency – technology is being used to add value, helping corporates to achieve greater visibility over their operations and greater insight into their transactional behaviour. As Carole Berndt, Head of Global Treasury Services, EMEA, Bank of America Merrill Lynch notes, “If you think about the value that we as a bank can bring to a client, of course we can move their money from one place to another, that is a core capability, but the true value – what we call, ‘return on relationship’ – is in the information that we can feed back to them about those transactions.”
Looking to the future, the sharing of information between corporate and bank, bank and corporate, can only serve to enhance the efficiency of the treasury function. As our panel argues, this in turn should ensure that the treasurer stays firmly in the spotlight. Knowledge is indeed power.
TRANSACTION BANKING LANDSCAPE
EH (FX-MM): ARE RELATIONSHIPS THE LINCHPIN OF TRANSACTION BANKING TODAY? HOW HAVE RELATIONSHIPS CHANGED AND WHY?
Anthony Richter (HSBC): Over the past three years, the meaning of relationships has changed in both directions. This is true in particular for corporate treasurers as the way in which corporates value and manage their banking relationships has evolved quite rapidly. Now more than ever, corporates are looking for reliable partners who are going to be there for them today and in the future.
Obviously credit is still a keystone of any major relationship with a customer but there’s also the element of building ancillary services on top of that. Transaction banking, which traditionally covers trade finance, payments and cash management and possibly securities services for some clients, is absolutely crucial for building a core banking relationship, together with treasury services, notably foreign exchange.
So yes, relationships are absolutely still the linchpin of transaction banking today.
Ravindra Madduri (Barclays): I would add that transaction banking is a highly involved discipline and relationships are at the heart of everything that we do. During 2009 and 2010 there was a great deal of focus on relationships being tied to credit. In 2011 however, while credit is still an important factor for treasurers, it is no longer the number one ingredient.
Carole Berndt (BAML): Historically, and certainly through the boom times of 2003 – 2007, the definition of ‘relationship’ became somewhat confused with ‘revenue’. As a result of relationships being measured, by some organisations at least, against share of wallet, the industry as a whole became quite product and price focused. As we worked through the global financial crisis however, those relationships that were measured by revenue started to become passive and flat.
Today, relationships are far more threedimensional. It’s about having an end-to-end holistic view of a client’s needs and acting in the best interests of that client in the longterm, not just for short-term gain. For instance, it could be that the best way to fund an M&A transaction is in fact to improve a client’s working capital, rather than going straight to the capital markets.
Essentially, good relationships depend on the ability to support your client through knowledge and information. The more we know about our clients, the more we can build trust and transparency, which are a key part of our relationship approach.
Relationships in the FI space have a slightly different dynamic as sometimes your client is also your competitor, but they are also potentially your joint venture or collaboration partner. That relationship requires a different level of trust. When organisations get the collaborative approach right, it can be extremely powerful, allowing institutions to evolve in tandem and to take their business further together.
Daniel Schmand (Deutsche Bank): Absolutely. Transaction banking is not about a one-off deal or trade, it’s about ongoing collaboration. As such, it is imperative to have good and trusted relationships in place to create and offer products that are truly targeted to the client base. During the recent crisis, however, we saw a refocus of what the most important elements of that client/bank relationship were. Clients are now evaluating relationships based on how openly and transparently they were able to work with their bank during the crisis.
RM (Barclays): Crucially, relationships are the one area where banks can truly differentiate themselves. In this increasingly regulated environment, it is likely that the product offerings of major banks will look broadly similar going forward, this is particularly true within Europe with the introduction of SEPA and the PSD for example. It is up to the banks to differentiate themselves through their approach to client relationships and the value-added services that they offer.
Lars Millberg (SEB): We should also mention that the importance of relationships extends beyond the point-to-point bank-to-corporate relationship however, they are crucial throughout both the banking and corporate organisations. Within a corporation, treasurers need to build relationships with other parts of the business in order to service the wider needs of the business, manage working capital effectively and optimise the financial supply chain.
Within a bank, knowledge of a customer needs to be shared internally in order to deliver a high quality of customer service and maintain customer confidence. Different departments need to work closely together to deliver solutions not only in transaction banking, but that extend across the bank’s portfolio in order to meet customers’ financial needs in a cohesive, comprehensive way.
EH (FX-MM): HAS THE NOTION OF A ‘ONE-STOP-SHOP’ FOR GLOBAL TREASURY NEEDS BECOME AN OUTOF- DATE IDEAL?
LM (SEB): During the financial crisis, the restrictions on credit meant that corporates became more inclined to divide up their ancillary business across their lending banks, as well as diversifying their risk. Since then, corporates continue to recognise the need to manage risk and manage banking relationships on a more holistic basis, so they are less inclined to seek a single global provider than they did before the crisis. Today, therefore, treasurers are choosing best-in-class providers for the solutions that they require in the relevant regions. This could result in awarding large parts of the business to a single provider, while in other cases, treasurers will work with multiple banks with specialised capabilities in the relevant countries.
Dominic Broom (BNY Mellon): In our experience, while a centralised approach can work for multinational companies, it is far from ideal for mid-cap or smaller corporates that require solutions that are flexible enough to take the requirements of their individual markets into consideration. What they need is a globalstandard service that can be tailored and delivered in a way that suits their individual needs. This can be achieved through partnerships between local and global institutions, which can combine domestic market intensity with cutting edge banking platforms.
Going forward, I believe that partnerships between local and global institutions provide the best recipe for success. While regional banks offer local market expertise and local customer familiarity (both crucial in today’s transaction banking scene), global providers can deliver visibility, network consistency and maximum efficiency at all points along the transaction chain. Marrying these two offers means that all stakeholders – global institutions, local banks, third party service providers and end-user clients – benefit from ‘best of breed’ solutions and service. Certainly, this aim lies at the heart of our ‘manufacturer-distributor’ collaborative partnership model.
LM (SEB): Absolutely – working together with partner banks with aligned solutions and services should now be a priority for banks, in order that their customers benefit from a cohesive cash management strategy globally.
DS (Deutsche Bank): I would say that today it’s less about the one-stop-shop and more about making sure that the client has a consistent relationship, no matter which part of the bank they are dealing with. For example, our Capital Markets and Treasury Services relationship team covers all products within the bank from transaction banking to global markets so that we have ‘one face’ to the treasurer.
Our relationship managers have product specialists at hand if there is a specific question from the treasurer, so it’s more of a single point of contact approach with a diverse pool of specialists addressing specific client requirements. In turn, this approach provides the treasurer with a more holistic view of their banking activities.
CB (BAML): I liken this to building a house – where it is common sense to bring in a variety of people to carry out different jobs depending on their specialisation – be it a carpenter, project manager or architect. If one person were to fulfil all of those roles, you would inevitably have to make compromises. The same is true of banking relationships.
Post-crisis, corporates are very aware that they need a good project manager. Once the corporate has enlisted the services of the best project manager (their primary relationship bank), the project manager can then locate the best carpenter (local partner bank) for the job – rather than the client having to do so themselves.
This approach fits very well with our strategy. Rather than trying to bank everybody everywhere, we sometimes choose to work with local banks to provide in-country knowledge and extensive domestic capabilities. This integrated partner bank model gives our clients the best of both worlds – a reduced number of bank relationships and a comprehensive suite of financial solutions delivered seamlessly through a single global interface.
RM (Barclays): I would also add that counterparty risk concerns are still high on the corporate agenda. As such, corporates are looking at where their risk is concentrated and whether they need contingency plans in place – corporates want the comfort of knowing that they will be able to carry on business as usual if their primary bank fails. This has in many senses taken the focus away from the single bank provider model that was so popular pre-crisis.
EH (FX-MM): IS REGULATION (EG BASEL III) THE TOP CONCERN FOR 2011?
DS (Deutsche Bank): Am I concerned about Basel III? Naturally, there is some concern but it is the same for all banks. And among the entire banking community, we are yet to find an institution that can clearly define what Basel III means for them and the industry. Deutsche Bank is still investigating the full extent of what it will mean for our projects and set-up and what the effects on the corporate side will be. Put simply, whatever we are affected by eg higher capital requirements, more stringent rules, or more documentation requirements, there is always a price tag. As such, we need to drive efficiencies internally to make sure that the maximum amount of costs can be absorbed our end and not by the client.
Having said that, our view is that across all the products a bank offers, the traditional treasury products are those that will be least affected. Where the crisis came from is where the highest capital requirements have been focused. The question really is how we – the banks – can approach the treasurer in a more intelligent way to do financing in a risk weighted asset friendly way. So we need to look into our products and see how we can make them less risk weighted asset intensive.
Regulation is certainly the top risk but I would say that reputation risk is also near the top of the agenda. Reputational risk can be ten times more expensive than typical operational and financial risk and has the ability to entirely kill off an organisation. The key is to know your customer and recognise their needs through your product suite.
LM (SEB): While regulation will be an issue in the coming years, 2011 will typically see banks re-aligning their capital structure and funding strategy, and reinforcing compliance, technology and processes. As these activities are predominantly internal to a bank, corporates are unlikely to see a significant business impact in the short term.
Furthermore, the changes that such regulations may require are not limited to a particular business segment such as Global Transaction Services. The way in which each bank incorporates significant new regulations is a group level strategy, so it is not yet feasible to determine what the detailed implications for specific client groups will be.
EH (FX-MM): DO YOU SEE THE TREND TOWARDS TREASURY CENTRALISATION CONTINUING OR ARE HOLES BEGINNING TO APPEAR IN THAT MODEL? HOW CAN BANKS HELP CLIENTS TO OVERCOME THE PAIN POINTS ASSOCIATED WITH CENTRALISATION?
RM (Barclays): While we may have seen corporates shifting away from the single global bank model to a multi-bank approach, this trend should not be confused with a lack of clear centralisation objectives.
The trend of decentralised treasuries moving to payment factories and on to shared service centres and even in-house banks used to be restricted to the likes of FTSE 500 companies. What we have seen over the last ten years or so, however, is that the implementation of shared service centres has moved down from the very top-tier corporates to large corporates or even mid-tier corporates. Centralisation is definitely here to stay.
DS (Deutsche Bank): Absolutely. The crisis has shown where the weaknesses are in the system and companies still have many more efficiencies to gain. We are seeing more and more corporates – of varying sizes – work towards centralisation and getting a better grasp on their liquidity. What’s the reason for the continuation of this trend? Centralisation is a key driver for risk management and efficiency and I have no doubt that this will continue to be the case.
LM (SEB): At SEB, we have worked with gtnews-polls for the past few years to understand broad treasury trends. This has illustrated a very clear trend towards centralisation. However, despite corporate ambitions, actual progress has been slower than anticipated, as it is frequently a major project with considerable cultural, organisation and technology ramifications. Some of the newer industry developments, such as SEPA and PSD, SWIFT Corporate Access and increased usage of ISO 20022 XML on a global basis are likely to act as enablers for further centralisation of payments, collections and liquidity management, and will alleviate some of the challenges associated with centralisation. In addition to payments and cash management standardisation offered by ISO 20022 standards, there is also potential for this standard to be extended to trade finance.
Banks can support their customers’ centralisation efforts more effectively by understanding and assisting to a greater extent in optimising core business processes.
DS (Deutsche Bank): In terms of overcoming the challenges, we believe that corporates have a lot of internal issues to deal with on a day-to-day basis such as tax and legal requirements. In order to shift the power and authority from the local finance functions to a central location, the corporate will need to invest in systems, to set up new processes, to review existing structures and so on.
In other words, centralisation isn’t easy. We see the role of the bank as one of an advisor in the early stages of centralisation – not to sell or propose products – but to guide the process. We also believe in bringing treasurers together in small groups to discuss their experiences with their peers, connecting companies who have faced and overcome similar challenges.
DB (BNY Mellon): Although centralised treasury hubs can deliver benefits for corporates of a certain size, especially when trading in diverse locations, I would say that they do not always allow for an accurate overview of the risks inherent within the endto- end transaction cycle. This requires sophisticated treasury management solutions, which can be very expensive to implement, and many such hubs were established with cost control, rather than risk management concerns in mind.
What’s needed at all levels, is a better understanding and increased transparency over transaction flows and credit reporting, and centralisation alone cannot deliver this in today’s post-crisis environment. Banks can help corporates overcome their working capital management problems by enhancing and sharing local data and transaction management activity; a process that can be achieved through partnerships that place the client at the centre of the data management process.
AR (HSBC): Just to take a slightly different angle, I personally feel that SEPA will be a catalyst for driving greater centralisation at a more accelerated pace. SEPA is an ideal opportunity, given that everything is commoditised and standardised, for the corporate treasurer to centralise the activities which would have previously been spread across numerous locations.
In turn, centralisation is an opportunity to reduce the costs of running multiple bank accounts across a region, and possibly even to reduce the number of banking relationships in place. Just as important is the fact that a centralised company’s liquidity management should become more efficient because they are running fewer accounts where there is liquidity either hiding away or where there is a need to fund a liquidity shortfall. SEPA can only add benefit to that centralised structure – you can optimise liquidity practices and move surplus liquidity to those entities within your group that need funding. In that way you can also reduce your overall bank debt.
EH (FX-MM): CORPORATES ARE BUSY BREAKING DOWN INTERNAL SILOS – ARE BANKS MANAGING TO DO THE SAME AND TO DELIVER FULLY INTEGRATED TREASURY SERVICES?
CB (BAML): What we are seeing is that the traditional lines between investment banking, corporate banking and transaction banking have become blurred, in particular where there are strong, holistic relationships in place. As such, banks are working towards breaking down silos and having their teams structured around client solutions rather than products. This holistic view is really reflected in the corporate by the expanding role of the treasurer which now encompasses everything from cash and liquidity management to trade solutions and procurement.
DB (BNY Mellon): As banks look toward the future, they are increasingly recognising the importance of catering to the needs of their clients, rather than focusing on vertical product offerings. Banks need to improve client understanding and adapt their services and solutions accordingly.
This may mean bringing in outside service provision, should client needs extend beyond their specific area of expertise. When placing the customer at the heart of their thinking, banks must remain honest about where they can, and cannot, add value.
RM (Barclays): As corporate infrastructures become more global, banks are increasingly focused on the cross-border services that they offer – not only in the geographical sense – but also in terms of the traditional ‘borders’ or silos within their own organisational structure. For instance, banks have traditionally operated with trade silos and cash silos, but really these are no longer justified externally. Corporates want a holistic approach to treasury services and in many cases are looking to include cash and trade under one umbrella, whilst incorporating other areas, such as FX and card services, to create an integrated offering.
Put simply, the treasurer’s role extends across the organisation and as banks we must reflect that in the services that we provide.
LM (SEB): We are certainly witnessing this amongst our customers, and while the banking sector is now responding in kind, it has lagged behind the corporate community to some extent. At SEB, we have been a forerunner in achieving fully integrated services to our corporate customers by combining our trade finance, cash management and factoring/supply chain financing activities into a single organisation with a common approach to solution design, delivery and customer service. This segment also works closely with SEB Trading & Capital Markets in order to deliver solutions to our customers that span their financial activities.
CHALLENGES AND OPPORTUNITIES
EH (FX-MM): WE’VE MOVED FROM TALKING ABOUT THE CURRENT CRISIS TO THE RECENT CRISIS – DOES THIS MEAN THAT THE TREASURER WILL NO LONGER BE IN THE SPOTLIGHT?
LM (SEB): While the worst days of the crisis are still sufficiently fresh in the corporate memory for treasury to continue to be recognised a key contributor of value to the business, it is only reasonable to expect that the spotlight will shift from liquidity and risk management to activities that increase revenues and profitability. Even so, it is likely that we have seen a permanent change in the role and recognition of the treasurer, which is a positive sign for the future.
RM (Barclays): The only way is up. Throughout the crisis, the role of the treasurer has become much more strategic. Going forward, I can certainly see the treasurer being more heavily involved in bank relationship discussions and this extends to the Accounts Payable Manager as well. But strategy is certainly the key word to focus on here as the treasurer’s involvement at board level can only continue to grow and develop.
DB (BNY Mellon): Treasurers have been the unsung heroes of the crisis and their role has now largely shifted from immediate crisis management to ensuring that the crisis does not repeat itself. Considering that treasurers have the knowledge and experience of dealing with difficult periods, as well as a detailed overview of all business silos; they are in the best position to implement the ‘prevention is better than cure’ theory.
The welcomed and much needed return to prominence of transactional and credit risk management disciplines, means that holistic business management is crucial for future success. An oversight of the bigger picture, rather than the minutiae of individual costs and parts, is now needed, and this is the treasurer’s strength.
DS (Deutsche Bank): Treasury is now viewed as an important and strong function within the corporate and, if anything, the role of the treasurer is not devolving but evolving. Let me just highlight a trend that reflects this: business units are increasingly getting involved in using the internet for selling goods, this throws up the question of payment – what is the company’s card strategy for example? As such, treasurers are being asked for help and advice by more and more parts of the business. With the growing interest in accounts payable financing and supplier finance, the treasurer has also become the facilitator for bringing procurement into general business processes.
In the future, I believe that we will see the treasurer getting involved with initiatives such as mobile payments as well. So as long as the world is still turning, there will always be new challenges for the treasurer to step up to at a strategic level.
EH (FX-MM): WILL SEPA SELL ITSELF NOW THAT AN END-DATE IS IN SIGHT OR DO CORPORATES STILL NEED COAXING OUT OF THEIR COMFORT ZONE?
RM (Barclays): It’s time to start getting a bit more serious about SEPA. Many corporates have shied away from SEPA for the past few years and some continue to do so. I believe the public sector will be critical in helping to drive SEPA adoption – after all over 20% of all payments within the Euro zone are currently generated by public sector institutions according to the 2008 World Payments Report. Once corporates can see the schemes operating efficiently, rather than just hearing about the potential benefits, this should go some way to demystifying SEPA.
Nevertheless, the emphasis is not solely on the corporate here – the banks have some legwork to do as well. Although there has been movement in terms of an end-date, SEPA remains in a transition phase and both effort and input are still required from all stakeholders to perfect the offering.
DS (Deutsche Bank): Personally, I would say that SEPA is no longer an issue. The topic has been well addressed by the banks in this space with a number of well thought out products and now it is really a question of just making sure that, for corporates, SEPA is synonymous with ‘business as usual.’
LM (SEB): Confirmation of a defined end-date for SEPA migration will certainly create the necessary business justification for corporates to adopt SEPA payment and collection instruments. However, as the vast majority of treasurers and finance managers will find themselves dealing with this type of project for the first time, they will definitely need to source expertise and advice from their banking partners.
One of our key messages to customers is that SEPA should not be considered simply as a compliance project but as an opportunity to achieve greater process efficiency and better control over liquidity.
AR (HSBC): Recent ECB indicators suggest that some 13% of the market has switched to using the SCT, so after almost three years up and running, SEPA still needs some help to get off the ground. The end date regulation is aimed at speeding SEPA up and there is no doubt that we are seeing a greater level of interest now that the draft regulation has been published. Inevitably, some corporates will need a certain level of encouragement, but the longer they leave it, the harder it will get.
We need to recognise that this is going to be a regulation, so migration is going to be mandatory. Corporates need to prepare themselves to migrate from the legacy way of doing payments to SEPA. As a bank, we are gearing ourselves up, holding roundtables with our customers, we have fully briefed our sales people across the region in order to keep our customers up-to-date and of course we are also very active in the industry.
If I were a corporate, I would appreciate a fair amount of hand-holding through this migration exercise. We’ve spoken in the past about the business case – which I do think is solid, in particular as I mentioned, when combined with treasury centralisation – but now it’s a case of finding the least painful way of migrating to SEPA. I imagine corporates will need assistance in understanding where all their European banking business is and also in deciphering the issues around BIC and IBAN. In addition, the treasury software that is used to make payments needs to be SEPA-compliant and must meet the requirements of this new regulation that is about to be passed.
And the requirements of the regulation are set at quite a high level because the European Commission is very keen to make sure that the market is future-proofed and competitive. As such, there are some quite challenging areas for companies, assuming the regulation is passed in its current form.
One of the biggest challenges for the corporate is that any company sending a payment file to the bank must do so in ISO 20022 XML format. While this may be achievable for large corporates, it is a lot to ask of the smaller and even mid-market corporate. In our view, the additional conversion of the payment files at the customer end – when we already offer a free service that conducts that conversion once the file arrives at the bank – is an unnecessary and additional burden on our customers.
We are lobbying quite hard against that particular article in the draft regulation and we would encourage our customers to do the same, for their benefit.
CB (BAML): We are very bullish on SEPA, both for our FI clients and our corporate clients. Inevitably, there has been a great deal of talk about SEPA and the seemingly low levels of uptake, but with the financial crisis and the noise around Basel III, SEPA has not received the attention or priority that it warrants. With the mandatory transition to SEPA approaching however, we are expecting to see the tables start to turn.
As a global bank, we see SEPA as an enormous opportunity and we are ready to help our corporate clients with their SEPA transition. Now that people are starting to reflect on what the end-date actually means though, corporates should put a migration plan into action sooner rather than later, allowing them to get ahead of the masses and avoid any congestion from their peers as we approach the migration date.
Equally, time is of the essence in the FI space and I believe the first movers will have the incumbent advantage. As such, FIs that are slow to move to SEPA capability are probably going to find themselves purchasers of wholesale capability more so than being primary providers.