Cash management in the spotlight in turbulent times

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THE PARTICIPANTS

THE ISSUES

• The effects of the liquidity crisis on businesses from a cash management perspective

• The impact of the liquidity squeeze on client relationships

• The impact of regulation on business models

• The importance of investing in technology

• Trends and challenges

• The effects of the liquidity crisis on businesses from a cash management perspective

 Charlie Corbett, economics editor at The Banker, opened the debate by asking the panel how the recent liquidity crisis had affected their businesses from a cash management perspective. Darsh Johal, global head of cash management at Shell, said that the impact of the credit crunch, which had so far only affected the banks, was now affecting the corporate side as well. “We’ve had to diversify our portfolio of deposits and... reduce the credit limits that we have with a number of our bank counter parties. We do have a large surplus of cash at the moment which adds to the problem, and I guess some people will say that’s a nice problem to have, but it’s also quite a challenge in the current environment.” Naveed Sultan, head of global transaction services for EMEA at Citi, said that the liquidity crisis had put pressure on banks’ balance sheets because of the tightening of liquidity in the inter-bank market and the lack of availability of credit.

He said that Citi was actively looking to ease its clients’ liquidity concerns through financial effective supply chain management, particularly on the corporate side. “From a corporate sector standpoint, as credit becomes more scarce, corporations want to make sure they are ­optimising their own internal liquidity,” he said. “We are providing solutions whereby a corporate can have visibility into its liquidity position and working capital around the world.”

For Clare Ward, senior director of UK-based pension payments specialist Xafinity Paymaster, the most important priority in choppy markets was making sure her two million or so pension clients got paid on time. Ms Ward agreed that even though Xafinity Paymaster’s business was not the most glamorous in financial markets, it was nonetheless a crucial service, and having an effective transaction bank was critical.

The dearth of liquidity brought about by the credit crunch has had a “huge impact” on the asset management industry, according to Bruno Noble, head of client service and marketing at fixed income specialists ­Western Asset Management. For Mr Noble the ability for banks and structured investment vehicles to finance themselves has been severely capped, leading his clients to reassess how much risk they are willing to take and how much return they are willing to accept.

“There has [been] a knee-jerk reaction; we’ve seen a lot of people going to much safer treasury-type products with far less ambitious return objectives,” he said. “And it is too early to say how this is going to resolve itself, but I think that in a year, or two years’ time, we’re going to see a very different type of product range put out by the cash ­management and asset management industries.”

• The impact of the ­­liquidity squeeze on client ­relationships

 Charlie Corbett asked the panel what kind of impact the credit crunch had had on their client relationships. Mr Noble said that in the presence of the cameras he was unable to articulate many of the comments made by his clients as a result of the market conditions. He added that priorities had not changed but that the spotlight had been shone on them. “This business is about communication... making sure that clients are continually kept informed of developments in the market and in their portfolios,” he said. Mr Johal found that as a corporate customer, Shell’s priority was in developing a tighter integration of its business model with that of its transaction bank. “We’re getting more and more integrated and technology plays a large role there. But it is very important for the banks to deliver an operation of excellence... high quality, good services. These are the things that would differentiate the banks between the other competitors in the market,” he said. When asked if his confidence in banks had been shaken by the recent global liquidity crisis he said: “I think you have to say yes. People are shaken by what has happened in the markets but it is a global issue and not restricted to one or two banks.” He stressed that it was not an easy task for a bank to suddenly switch focus from traditional revenue generators, such as loans and financing, to transaction services. “I don’t know how a bank actually changes and shifts its model to have more focus on cash management during a period like this, because it is quite a lot of investment to put in... you can’t just shift that investment focus in the short term, and then hope to ride out this storm for a year or two.”

Mr Sultan said that the priority for transaction banks was to add value to their traditional corporate services. “Delivering greater value around working capital, a greater visibility, infor­mation access, standardisation, risk management – all those factors haven’t really changed, it’s just that there is enhanced focus now, considering what is happening in the marketplace.”

From the perspective of financial institution clients, such as asset managers, Mr Sultan said the main priorities were supporting liquidity and delivering operational excellence from an execution standpoint. “They are looking for transaction banking businesses like us to provide the middle-office and back-office support and processing,” he said.

THE KEY ISSUE: The impact of regulation on business models  

As a raft of new regulation hits Europe, Mr Corbett asked the panel to comment on what impact ­legislation such as the single euro payments area (Sepa) and the ­Markets in Financial Instruments Directive (MiFID) has had on their businesses.

Mr Noble’s greatest concern was the law of unintended consequences. “Regulation is always made with the best of intentions, but it is very difficult – maybe it is beyond the power of regulators – to really understand what the consequences of their actions will be.”

He used the example of the ­Pensions Acts of 1995 and then 2004, which led to the closure of a number of defined benefit pension schemes which the legislation had not set out to do.

“Whenever we see new regulation being touted, I think one should really consider just how it is going to impact the areas of the market that it is designed to address,” he said. “I am not convinced that we can say today what the impact of all the changes is going to be.”

Ms Ward agreed that there was a danger of unintended consequences with all new legislation. For a company such as Xafinity Paymaster, she said, the regulation she was experiencing was all about ensuring that customers in the pensions system are treated fairly.

Citi’s Mr Sultan said that it was important to work with the reg­ulators earlier in the process so that it was more likely that objectives converged. “And you deliver those objectives through a market-led ­initiative, where realistically ­possible, rather [than] through ­regulation.”

He added that regulations such as Sepa and MiFID were leading to consolidation in the market as banks were increasingly inclined to co-operate with one another. “A word that we call ‘co-opetition’, meaning you can compete and collaborate in the marketplace at the same time,” he said.

“Banks... are reviewing their business models, and they are saying ‘let’s focus on core competencies, but for other capabilities we’ll join hands with somebody else to buy some of those capabilities’.”

Mr Corbett then asked whether there was a risk when banks outsourced some of their transaction banking services to others that they might lose clients to the bank that they outsourced to.

Mr Sultan disagreed. “It is a much more broad-based relationship with the institution, which cuts across multiple products and multiple functional areas,” he said. “We believe that the risk is very marginal for a client walking away just because there is a capability you have given to another bank.”

With regard to the impact of Sepa on his business, Shell’s Mr Johal said that most corporates were taking a wait-and-see approach.

“There has been a slow take-up of Sepa... and from what I have seen in the marketplace from speaking to Citi and some of our other bankers, there is traffic coming through, but that [is] probably still a very, very small percentage of [total] volumes that exist in Europe today,” he said. “I think the main kick-in will come when the direct debits are implemented across Europe, and that’s what most customers – corporate customers – will be looking to ­implement.”

• The importance of investing in ­technology

Ms Ward believed that getting the right kind of technology was critical to the payments business, especially when it came to overseas payments, but that technology was only part of the ­solution. “Sometimes things do go wrong, when money gets stuck somewhere, so it is really down to relationships and actually trying to unravel what’s gone wrong,” she said. “There’s a tendency for finger-pointing... and if you’ve got irate people on the end of the phone demanding money, and it is not clear where it is, it is important everyone pulls together to try and sort that out.” Shell’s Mr Johal agreed that when it came to overseas payments, finding the right technology as well as the right relationship bank was crucial. “We have operations across 130 different countries so the global reach of our bank partners, as well as the local presence and the depth that they have, is very important for Shell,” he said. Citi’s Mr Sultan said that the twin forces of globalisation and technology were accelerating cross-border activity, which meant that international companies such as Shell needed more centralised financial management processes. “Technology today... enables you to integrate your distributed business presence around the world,” he said.

Western Asset Management’s Mr Noble said that technology was an essential cost and that at least 15% of the firm’s revenues had been spent on information technology every year for the past seven years. “Spending on IT brings obvious benefits. It helps you benefit from economies of scale in really crucial areas, such as portfolio management, trading and compliance. It also minimises the risk and cost of human error.”

Mr Noble said that this was reflected by Western Asset Management’s global bond business: “About 80% of our bond trades are with about 20 custodians. If you look at the remaining trades that we undertake, we trade with about 150 custodian banks across the world, where we only have one client. We find that there are [banks such as] the Citi’s of this world who really invest in technology – and can process any transaction that we undertake – but there are also lots of smaller players out there who really haven’t kept up. And I think they are coming under pressure.”

Mr Sultan said that traditional ­business models were becoming unbundled not only because of advancements in technology but also because of ­regulation and competition. “You’ve got to adapt your business and operating model, or your strategy, to reflect that reality. You focus on your top ­priority, which... is managing your ­relationships with the clients and creating value-added solutions for them.”

He added that banks were increasingly focusing on their core capabilities and outsourcing other internal infrastructure and related capabilities to third-party providers.

• Trends and challenges

Mr Corbett asked the panel what each participant felt was the biggest challenge the future held for their businesses. According to Shell’s Mr Johal, the market will see a continual evolution of what’s been happening already in the past few years. “As was said earlier, cash-management is the tortoise, so a lot of things move slowly, but I think that is important, because things must work correctly and properly. Efficiency is the key,” he said. “Some of the developments we’ve seen over the past few years, such as SWIFTNet, corporate access, XML and Sepa, will continue to evolve and we should see some accelerated adoption [of those developments] in the marketplace.” For Citi’s Mr Sultan, such developments as the recent purchase of ABN AMRO by the Royal Bank of Scotland-led consortium, will continue. Added to this, Mr Sultan said that the market would continue to see structural changes and the emergence of new competitors in the landscape. He stressed also that clients are becoming more sophisticated and demanding more integrated and technology-driven solutions. Finally, he said there was the emergence of a new paradigm where the banks were increasingly making decisions to buy technology rather than build it themselves.

Xafinity Paymaster’s Ms Ward said that there had been a commoditisation of the market, which had acted to drive prices down, and that this would continue. She added that her company was continuing to work on initiatives that made it easier for clients to execute cross-border transactions, such as foreign workers in the UK sending money home to their families: “[With remittances] there’s the issue of knowing your customer, and identity. That’s something that we’re very much in tune with, because of the legal implications of sending money.”

Western Asset Management’s Mr Noble said that the liquidity crisis and the partial or full closures of some asset classes such as asset-backed securities or asset-backed commercial paper meant that in the future, the opportunity for diversification across asset classes would be reduced. “Over the next months or years, we’ll all have to have a far clearer understanding of what it is exactly we’re offering our clients... and what risks are associated with each approach,” he said.

The impact of regulation was another clear concern for the panel. Mr Corbett asked each member of the panel whether they feared regulation or whether they embraced it.

Shell’s Mr Johal said: “It is a mix of both, but you are more healthy if you embrace it and have more of a strategic approach to it.”

Mr Sultan agreed with Mr Johal and said that regulation was inevitable so it might as well be embraced and it is important to work with the regulators. “If you’re not engaging with the regulators then there is a risk to it because the regulation can go overboard, so you really have to work with them to make sure your objectives come together.”

Ms Ward agreed: “Absolutely... embrace it. It is about working openly, isn’t it? The intentions of the regulators are usually pure and good. Sometimes there are unintended consequences, it is true, but the intentions are right, so it is about working openly, and ensuring that the right outcome is achieved.”

Mr Noble said there was no choice but to embrace regulation: “You have to embrace it, you have no choice, but if you work with the regulators as closely as possible, then all parties ­benefit.”

Summary

As the uncertainty in today’s market environment continues, there is an increased relevance in the value-added services and operational efficiency that is at the heart of transaction banking. For banks and their financial institution cousins facing margin squeeze through commoditisation of their traditional product offering, increasing investment in technology to meet the demands of both the regulators and ever more sophisticated clients is resulting in the review of business models and a focus on building core capabilities and then outsourcing what is left.