Many corporate businesses are beefing up their treasury operations, growing less reliant on their banking partners and moving to bring more of their cash, payments and transaction services operations in house. However, banks are fighting back against this trend by updating their own offerings. Writer Nik Pratt

It is recognised that the average multinational will have a treasury department that is every bit as sophisticated as a bank in its infrastructure and its capital markets activity. More capability within the treasury profession combined with the greater availability of technology and tools have enabled treasurers to expand their repertoire and be less reliant on their banking partners.

In the past decade, a number of corporates have developed their own in-house banks, often for tax and regulatory purposes, have entered into joint ventures such as shared service centres and payment factories in order to reduce costs, and have established industry consortia such as the Corporate Funding Association and the Twist standards body to address issues such as the shortage of bank lending and the lack of interoperable messaging protocols.

While banks can take some solace from the fact that these trends have mostly been driven by an opportunity for corporates to save money, they should be more concerned about the fact that some corporates are opting to develop their own cash management platforms because they believe that they themselves can do a better job than the banks.

Taking ownership

"We have always had the view of doing as much [treasury work] as possible ourselves," says Ernie Caballero, vice-president for Eurasia treasury at United Parcel Service (UPS), where the majority of international treasury processes are undertaken in house. "With a bank or a treasury software provider, you typically have to mould your treasury processes to fit their products," he says. "If you want to modify their platforms to fit your operational needs, the costs can be prohibitive, not to mention the lengthy development and testing cycle that is necessary before implementation. From our perspective, it has proven to be easier if we do it ourselves."

Corporates have typically been dissuaded from building their own systems because of the supposed cost and work involved, but Mr Caballero says in-house development has paid for itself and has proved more economically viable than using third-party products.

"Years ago, we had one of the treasury software vendors supply us with a cash-forecasting platform, but it did not really work that well - it was not quick enough, it was not adaptable to our needs and it did not possess the operational flexibility to be scalable enough to adapt to changes within our operations," he says.

"The annual maintenance fees, even for something so inefficient, did not warrant the value proposition of the platform. Just by bringing a web-enabled cashflow forecasting process in house and behind our firewall, we were able to achieve our operational requirements and reduce headcount, for less than the cost of the annual licence fee. The fact that the systems are centralised and in house means that we are more efficient and can do more with fewer people."

Taking control

In addition to bringing more of their operations infrastructure back in house, some corporates have also taken more direct control over their financing - be that asset liability management, dealing with credit rating agencies or raising funds, says Andy Nash, group treasurer at Ahold, an international food retail group based in the Netherlands with market-leading positions in Europe and the US and an annual turnover of nearly €30bn. "Rating agencies are so important that we have always considered that this relationship should be managed in house and not through banking services, however good they may be," says Mr Nash. "But today there are other areas, such as committed credit facilities, where corporates are looking at the cost-benefit [ratio] of self-arrangement."

The decision to consider making their own fund-raising arrangements has been forced on some corporates by the credit crisis and the unwillingness or inability of many banks to provide loans to businesses. This has prompted industry-led projects such as the Corporate Funding Association, which is currently backed by a number of corporates and aims to provide a liquidity facility for member corporates so that they are no longer reliant on bank loans or credit.

The Corporate Funding Association is not only a reflection of the severity of the credit crunch but also a recognition of how corporate treasurers are increasingly talking to each other and working together in peer group forums - a development that further underlines the growing sophistication of corporate treasurers and the lessening reliance on banks. "We talk about market developments and capital structures and we also discuss the in-house systems that we use and how they were developed," says Mr Nash.

There are also other areas, such as payments, where many retailers consider themselves to be ahead of the banks in terms of services, according to Mr Nash. He refers to a trial that Ahold ran in the Netherlands with biometric payments using fingertip recognition - something that proved very popular with older users but is not currently being rolled out. Ahold is now looking at other ideas such as payment via mobile phones. "It is about staying closer to the customer and understanding their needs. I think retailers are better than banks at doing this and right now most retailers have a stronger brand than banks," he says.

Mr Nash does not necessarily view these developments in corporate treasury services as moves to remove banks from the market, instead seeing the new wave of in-house services as additional tools in a corporate's kitbag. "There are still banks with close relationships that work hard to understand what our needs are," he says. It is easy to tell these kinds of banks apart from the rest when their representatives come in for a meeting, he adds. "The less effective banks will talk about themselves and all the things they are doing. The good banks will only talk about your organisation and your needs."

Business as usual

The few banks still active in cash management insist that the relationship between banks and corporates is as strong as ever. "I have not seen any evidence of functions or processes moving from the banks to the corporates," says Anne Boden, head of global transaction services for Europe, the Middle East and Africa at Royal Bank of Scotland.

She adds that a number of treasurers may have experimented with the concepts of shared service centres, payment factories and in-house banks some years ago in order to save costs but in the past two years there has been a change of emphasis, with treasurers now looking to minimise operational risk and increase standardisation and transparency. "They want visibility and the ability to operate the same way in every country," she says.

Even those treasurers that have embarked on ambitious centralisation projects are merely changing the means of connectivity with banks rather than minimising that relationship, says Ms Boden. "They are looking to break up their business between two or three banks to minimise the dependence on a single bank, so they are bringing in bank-agnostic solutions such as SwiftNet and SwiftBureau to be able to standardise and have one single connection to all of their banks."

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Delivering greater efficiency: UPS has moved most of its treasury processes in house

Lack of choice

For corporates looking to reduce the number of bank partners, if not the extent of the relationship, there are fewer and fewer banks able to offer comprehensive and global cash management services that match the ambitions of their corporate clients. "Treasurers helped to bring many corporates through the financial crisis, so they are now front-of-house and able to demand much more in terms of their systems services," says Ms Boden. "Consequently, cash management has become a technology-intensive business. Banks have to provide leading-edge solutions and visibility of cash and we are one of a handful of providers that are able to do that."

Corporates could, of course, achieve their efficiency aims by building their own platforms but Ms Boden warns that such an approach can prove taxing. "It is achievable to do these things in-house but it costs money and involves a lot of resources. Bringing things in-house does not necessarily reduce cost. As a bank, what we are trying to do is make things simpler for corporates."

Nevertheless, it is becoming easier for corporates to develop more in-house treasury systems. The growing accessibility of technology, the advance of online services and the reduced cost of messaging and communication protocols such as SwiftNet have all contributed to this simplicity, even if the fact remains that most corporate treasurers would rather focus on the management of their funds than the development of software. Furthermore, too few banks have grasped the importance of standard systems in the same way as many multinational corporates have.

Mr Caballero says: "Our preference at UPS would be to have a fine balance of internal and external platform support but a lot of the potential providers did not possess the centralised capability that is so integral to how UPS manages its treasury on a global level. Most of the bank products are still designed on a country-specific basis."

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Anne Boden, head of global transaction services for Europe, the Middle East and Africa at Royal Bank of Scotland

International standards

Banks could help themselves by following the corporates' example and embracing international standards such as SwiftNet and developing software that can be installed consistently on an international basis, says Mr Nash. "For example, we dealt with one bank that had the same name for its cash-management platform in different countries but, when we examined it, we discovered that the software and functionality was totally different for each country - we almost fell off our chairs."

Mr Caballero does praise the efforts of some banks to provide treasury tools; UPS is currently using a guarantee issuance platform developed by Citi and an automated bank guarantee platform developed by Standard Chartered. Overall though, says Mr Caballero, the banks seem to be behind the curve and too many of their offerings fall short. "The banks have fallen behind on this because they have had other things to focus on," he says.

"However, this void has allowed corporates to spend more time developing their own platforms. In a way, this has enabled corporates to be bank agnostic. It used to be the case that a corporate would have to adapt to the bank's systems but this has been reversed. Now it does not really matter what bank you use as long as it can connect to your system."

Instead, says Mr Caballero, there is the increasing possibility of banks potentially licensing the UPS treasury platform rather than the other way round. "We have had several conversations with banks about them potentially white-labelling [rebranding] our product so that they can make it available to their other corporate customers," he says.

Difficult to reverse

Perhaps the greatest difficulty for the banks is the fact that those corporates that have invested in their own in-house systems may not want to revert to using a bank's products even if the banks do manage to design a more effective and efficient suite of treasury products. "Now that we have gone down this path, it is difficult to reverse," says Mr Caballero.

"The banks may be investing a lot of money in developing treasury services and tools but the platforms they are building have to cater to the needs of a vast array of clients. Building something that is specific to the needs of one organisation is rather difficult to undertake if there are not other corporates that have the same needs. We have spent a number of years fine-tuning our platform to meet our global needs; if we switched from our own systems to that of a bank, it would be a downgrade and it would be one that we would have to pay for."

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