Is your relationship the right fit?

Much of the recent press has focused on the consolidation trends in the cash management landscape. The market has had to cope with low interest rates, a more stringent regulatory environment, the growing demand from customers for more sophisticated solutions and the ever-escalating cost of investing in new and updated infrastructure to manage these changes.

It came as no surprise, then, that two distinct business models emerged a year ago.

We, at Deutsche Bank, argued that regional banks would maintain their dominant positions in their local markets while a handful of global players – those able to provide full service to retail, corporate and financial institution customers around the world in the primary currencies – would become the payment infrastructure providers to the majority of the financial institutions market.

This trend has continued and accelerated. The benefits of the scale-advantaged global bank have been well-addressed but there is a good question being asked by the majority of the banking community: “What’s in it for me? If I am a local or regional cash management provider, why do I care?”

Quite simply, now is a great time to be a regional bank buying services from global providers.

New focus

While some banks continue to spread business over a large number of providers in order to maximise reciprocal relationships, this is becoming more the exception rather than the rule.

Reciprocity is evolving into service partnerships, whereby local and regional banks buy services at the best price and service level from the best providers.

Also, the largest providers now often buy services from local and/or regional providers to complement their offerings, no longer believing that they have to build everything themselves (see diagram).

Along with the rest of the world, the cash management industry has begun to use the economic difficulties to repair balance sheets and to start an extremely healthy clean-up.

What’s in it for me?

Given that reciprocity is no longer the driving force in purchase decisions, the savvy and focused regional bank that is identifying what services must be built in-house, what should be purchased from an outside provider, and what should be developed collaboratively is in an excellent buyer’s market.

This bank has access to world-class products and services from global providers without having to build everything themselves.

For example, at Deutsche Bank, we now provide either full or component-based outsourcing functionality, enabling a regional bank to leverage our investment spend to benefit its own customer base.

This level of partnership would not have been available just three years ago and it delivers tangible benefits.

An end to confusion

When interest rates were high, many providers were vying for cash management business and the fragmented market created confusion in the mind of the buyer. Since then, there has been a notable shake-out. When a regional bank evaluates providers, it is now clear which have consistently invested in product, systems or infrastructure in recent years and which have not. Investing has included not only staying in the lead on all relevant payment systems, but also engaging in new systems from the embryonic stages (eg, European Banking Association, STEP 2), creating global contingency and resiliency, developing robust compliance standards and continuing to invest in customer-focused product features and functionality.

Increased transparency

Knowing what you are charged from end to end in a payment chain has become a competitive advantage. The profusion of ancillary charges has produced an obscure landscape of unclear repair criteria and “OUR” transaction charges (where the sender pays the transaction cost).

Since the introduction of the Single European Payment Area (SEPA) regulations, it seems that a few providers have made their processing systems less intelligent.

In the past, straight-through processing (STP) criteria included the local account numbers (BBAN) while now, some banks accept the International Bank Account Number (IBAN) alone as STP. The smart regional bank is able to link up with a global provider who can navigate the charging and STP landscape on their behalf to provide more complete transparency end-to-end.

The best service at the best price

Competition remains fierce for business that allows the regional bank, the “buyer”, to get the best quality at the best price from the right provider. Rather than easing with consolidation, competition is potentially intensifying.

If the regional bank has strong cash-management capabilities within its own local market, it is not unusual for a global provider to consider using select services from the regional bank to complement its own. Is this reciprocity? Yes, but decisions are based upon hard business logic, not the need to please multiple parties.

Ten questions to be asked for creating the best service partnership

By asking the right questions upfront then taking action, regional banks can capitalise on the buyer’s market when building strategic service partnerships.

• What are your overall business needs and primary metrics of success?

Business model clarity, including your own measurement of success, is essential before you can evaluate service providers. The first step is to understand your own strategic positioning, availability of resources and funding, and commitments. Knowing where are you now, where you need to be, and how you get there all start with an understanding of your own organisation.

• Will my partner enable me to achieve my critical goals?

At a high level, the partner must enable you to meet your critical business needs. Be it cost reduction or product-line expansion, your partner must work with you to meet your overall objectives and not merely a specific payment or service need.

• Does my partner have a proven customer-driven product development process?

The provider must offer a customer-driven development process, delivering products and services that join together into an overall solution to match your needs. In the heyday of the internet bubble, there was a profusion of products in development that were in search of a customer need to fulfil – these products were “cool” and “cutting-edge” but not necessarily useful. Those days are over and the last few years of budget tightening has swung the pendulum back in the other direction. The chosen provider must have not just products but a product development process that is customer-driven and continuously delivers solutions and needed functionality to the market.

• Will I be supported by a scalable, global platform?

A global platform combined with a global operating model is fundamental in delivering global solutions. A single payment platform that leverages synergies of processing the world’s leading currencies provides scale opportunities to invest in future innovations. Also, a global operating model provides 24/7 coverage and local language support throughout the payment chain.

• What are my options in case of disaster?

World-class contingency and resiliency capabilities are key in supporting your business needs and customer demands. When consolidating business with a single provider there is a degree of risk in case of disaster, as you have eliminated the option to redirect business quickly to alternative providers. Therefore, opt for fully redundant, tested and proven contingency and resiliency.

• Will there be liquidity constraints?

Your partner must have adequate liquidity to handle not only its own needs but be able to absorb your payment and receipt volumes without liquidity constraints. The ideal partner can also provide large amounts of liquidity to the overall payment systems when necessary.

• Will I meet my objectives more cost effectively and more quickly?

The provider must allow you to reduce costs and investment budgets. The easiest way is via a price reduction. A more strategic means is if the chosen partner enables you to leverage their global investment spend to the benefit of your own customer base and your own operational and business needs. There should also be an immediate improvement in your operational efficiencies by leveraging the capabilities of the chosen partner.

• What is the record of commitment and investment?

A history of and commitment to continuous, on-going investment in the business is critical. Year-in, year-out, this business must receive significant investment in order to remain competitive.

• Is your partner a recognised industry leader?

Your partner should be committed to driving the industry forward to generate efficiencies in payment infrastructure. The best partner is one actively involved in key industry initiatives, one that has a strategic direction and a clear vision of the potential for both parties.

• What does this mean to the bottom line?

Most importantly, both parties must have a clear financial benefit to the relationship. A ‘win-win’ business relationship must be established based upon clear economic realities. If both parties are not financially better off due to the relationship it will not flourish.

Poised for success

The past few years have been testing times for cash management banks. However, we believe that the difficult times are leading to a brighter future as many of the toughest decisions are already being made.

As interest rates rise – as they have started to do in the UK and the US – the risk is that bankers do not follow through on smart business decisions but instead let the rising tide of interest rates subsidise poor business models, which should have been updated.

We hope and believe that this will not be the case and that the right models will be pursued and the industry will be much healthier as a result. If you have a good business model, the correct business partner and normal interest rates, the result will be a healthy, profitable business.

Bernd Friederichs is head of financial institutions sales, global cash management, and Paul Camp is head of financial institutions strategy, global cash management, both at Deutsche Bank.

For more information on Deutsche Bank’s Global Cash Management capabilities, visit us at http://www.db.com/gcm or send an e-mail to gcm.marketing@db.com