Q&A: Deutsche Bank on the future of cash management

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Cash management is an increasingly important part of most banks' businesses. How do you think it will develop over coming years?

For Deutsche Bank and for the banks that are well positioned in the [cash management] space, 2011 should be a very strong year. Two-thousand and eight was a year defined by crisis, 2009 was a year defined by recession and 2010 was the first year of recovery for the developed markets. Emerging markets, however, have been growing strongly throughout.

The reason I'm so optimistic for 2011 and 2012 is the specific place we are in the business cycle. For me it's the sweet spot because growth is back on the agenda but investment budgets are very limited. While many people would complain about that, to me that's a fantastic time in the cycle because it forces banks - large banks, mid-tier banks and regional banks - to make choices. You need to think about your strategy, where to invest, and - specifically because of the budget limitations - where not to invest.

That to me is a great time. If you look back to 2006 and 2007, we were too high in the cycle and the investment budgets were too rich. When investment budgets are rich, people don't make choices, they spend on everything. In 2011 and 2012 we'll see growth, but growth with smart choices; a look at business models and making them work as well as leveraging partnerships for things that you can't do yourself. I'm really optimistic.

The cash management industry seems very optimistic at the moment. Is there a solid backing behind it?

I think the industry is a little bit too optimistic right now. I'm firmly positive, but it won't work for everybody. It will work for the right players, though. It will work for the players who are focused on their business model. But you don't have to be a big global bank to do well; you have to be a focused bank.

A mid-tier regional bank that has got a great focus on a great client franchise can do spectacularly well if it focuses on its clients, on what it can build and grow itself, and leverages partners to extend its network. I think, as in all years, everyone who tries to do everything will fail - it is virtually impossible with a limited budget to try to do all things.

One of the reasons that transaction banking has been so popular in recent years is that it has proven to be one of the more stable lines of business. However, some firms have been reporting high levels of growth and large customer wins. Is it possible to reconcile these two aspects?

It's impossible. People say they love transaction banking because it's 'sticky' and stable, but then say they're winning business hand over fist. If it's such a sticky stable business, how is it possible to win business hand over fist? It's really not. And so I challenge that, I don't buy it. It's a business you have to invest in year in and year out.

If you are winning business hand over fist [in transaction banking] and it's sticky, it makes me question whether you are winning business for the wrong reasons, such as price erosion or extensive credit exposure? Or perhaps because these are clients from a risk perspective that other providers don't want? I would challenge that and I would really challenge the concept that transaction banking can be built and grown quickly. It can't be. [Success in transaction banking] takes long-term consistent investment in product, in relationships, in building the client's trust, and in risk controls.

Are improved risk controls one of the more positive things to have come out of the crisis?

Yes, absolutely. The crisis made us all focus, if we hadn't before, on risk, be it credit risk, market risk, counterparty risk, or compliance risk and reputation risk. In cash management in particular, the risk of bringing money laundering into the system is huge. Risk management has always been important but its importance was absolutely highlighted during the financial crisis. Does it mean that every provider is good at risk management, though? Absolutely not.

It is something that was really a trial by fire in 2008. We lived through it and, I obviously knock on wood, we did quite well… It really was a learning period for everybody, though. It was something in my career that I will look back on and say I'm very happy to have gone through and passed. Going through it at the time was not a pleasant experience, however.

Is there a danger that cash management operations are facing excessive regulation?

My view of regulation is a very basic one. We live in an entrepreneurial society, and this spark of creativity that drives the economy forward is generally a good thing. But this creative energy often leads to places that it should not and oversteps its bounds. That's where, to me, regulation is critical. It's critical in establishing the rules and in establishing the boundaries. To expect regulation to know what those boundaries should be ahead of time is not possible, however.

In this society of entrepreneurs and entrepreneurial spirit, it's the creative expression that pushes the boundaries. Has regulation maybe been overdone? Maybe, yes. Has it been underdone? Maybe, yes. But we need both. We need this creativity that keeps the economy going forward, keeps innovation going forward, and we also need risk controls.

The cash management landscape is changing rapidly. What is the importance of the Asian market for you?

Asia is a clear focus. We've really built out our Asia team over the course of the past five years, and the level of growth in the market is spectacular. It's not just Asia, though, it's other emerging markets as well. So Asia, the Middle East, eastern Europe - which has suffered quite a bit in the past two years because of the financial crisis - and Latin America are also extremely interesting. But the Asian banks have made fantastic strides forward. If you look at the positions of the Chinese banks at October's Sibos conference in Amsterdam, my hat is off to them. They were very impressive, extremely professional, and the market capitalisations of those institutions are spectacular.

For the most part I'm really impressed when I go to Asia, but I also learn in every market. In Turkey, for example, where I go at least once a year, some of the banks really astound me with their level of professionalism and their investment in systems and their technology. It's the same with Brazil. There's so much to be learnt, not just from the existing global providers, but also from the banks that are the emerging powers in many of these markets.

Does that rise in emerging markets point to an increasingly collaborative spirit among banks?

It's absolutely there, although it has been part and parcel of what we do for many, many years, because our philosophy is to build what we're really good at but, if we can work with a partner who is better at something than we are, then to do that. At Deutsche Bank, we don't have 3000 branches in Brazil and we don't have 25,000 branches in China, but some of our partner institutions do. Where we can leverage those partners, we absolutely do it, with the clear-cut understanding that they're better than we are, but it's a partnership built up over years.

Generally, when we announce that we're working with partners around distribution in [their] country, they are also leveraging Deutsche Bank for our global capabilities. We want our partners to be as successful as possible in their home markets, and we want to be their partner of choice outside of that market.