Competition has been heating up among major cash management providers as they scramble to win mandates from both corporations and financial institutions,writes Jules Stewart.
There is now a considerable amount of focus on outsourcing among cash management customers, both corporates and financial institutions. It is not just the financial outsourcing, which has been the traditional space for banks, but also commercial outsourcing – the entire end-to-end process across the supply chain that entails all aspects of handling payments, collections, accounting functions, billing and other processes.
“In Europe, in the financial institutions’ space, in addition to the continued focus on straight-through processing (STP), we are seeing interest in back-office outsourcing, white labelling, funds services and third-party administration business,” says Swati Mitra, managing director of Citigroup global transaction services. “Corporates are pursuing standardisation initiatives [and] adoption of technology-enabled cash, trade and securities services solutions that facilitate their order-to-cash and purchase-to-pay cycles.”
Financial institutions have been more prone to outsourcing because they perceive many of the activities such as running a back office as a function not really associated with their value-added functions. “In Europe and the US, you will find a number of banks that have outsourced the processing of their trade, FX and other functions to another bank that is not in direct competition,” says Ian Clark, a senior manager with PricewaterhouseCoopers. “This trend is likely to continue, particularly when banks are not able to meet the standards of tighter regulations.”
Cash counts
Corporates increasingly see cash as a more important resource than was the case in the past. Global providers cover fund managers and financial institutions, as well as large multinationals, with a selected mid-corporate strategy.
The thrust is around the top end of the business, as banks want to be able to sell their customers more than one product. The suite of products available typically runs from liquidity management, primarily in dollars and euros, to payment and collection instruments, electronic banking and e-bills over the internet.
Other sectors
Cash management for financial institutions is not limited to banks. Insurance companies are among the most sophisticated users of cash management tools.
Insurance is a highly regulated business at a local level and these companies typically have a restriction on the treatment of excess cash and their ability to co-mingle that across geographies or products. Many large insurers usually have their own internal organisations through their investment arms to manage that cash, and hence can be considered early adopters of aggressive working capital procedures.
Fund managers are very much in the game as well and have a highly demanding collection requirement, finding themselves under pressure to collect their cash as rapidly as possible and to put it to work for their investors.
One characteristic of their business is a tendency to have an in-country focus on collection with an immediate repatriation of the funds to the investment arm to put the money to work for their customers.
Going for growth
“As for banks, what we see is that they are struggling to have a revenue proposition for their customers against a backdrop of increasingly expensive operating platforms,” says John Gibbons, managing director, working capital at ABN AMRO. “The dialogue we have with banks today is about how they can use our platforms to create top-line revenue growth. This is a big challenge, because banks run a huge risk of disintermediation by payments networks and the large regional and global banks. Under a recent agreement with Barclays, they will use our trade services platform and will market these services to their clients, but will operate on our platform.”
AmSouth in Alabama had a demand to provide FX services to its customer base, but found that it was not able to do so economically. The original idea was to reduce the cost of providing these services by outsourcing FX processing to ABN AMRO. In the course of that discussion, what ABN AMRO developed for the client was a programme to enable AmSouth to access the bank’s research and country information. This became a revenue proposition for AmSouth whereby it makes money on its FX business, and solidifies its relationships with customers by providing FX solutions.
Tapping the market
The challenge for banks is to bring down their costs and, more importantly, to grow the top line. Global cash management providers can tap into a network of people solely dedicated to the business of bundled outsourcing solutions to the banking market place.
They are now looking at areas such as the demand in the market place for securities services to support equities activities in bank clients’ organisations. Provider banks like ABN AMRO also have an international suite of products at their disposal to cover services for FX, trade and payments for banks.
There is clearly a merger taking place between the needs of the corporates and the financial institutions. Cash management bankers say that serving the corporate world is generally more complex, and usually involves a multi-location, multi-entity and multi-currency approach. Serving financial institutions, on the other hand, in most cases historically involved one currency and a single jurisdiction.
“We are seeing provider banks of cash management trying to unlock synergies by building platforms that then serve both customers,” says Norbert Wanninger, global head of cash management at Deutsche Bank.
“Almost by definition, to be a prime corporate cash management provider you have almost automatically built a platform to simultaneously serve financial institutions. On the high-value payment side, there is a clear merging of requirements with regard to service capability, information and settlement capabilities. So when it comes to serving high-value clients, there is not that much difference in the process,” he says.
New models
Mr Wanninger says that he definitely sees a trend towards outsourcing and re-visiting all the business models and breaking up some of those models that seem to have been set in stone for years. Given the current environment of low interest rates, with customer wallets still shrinking, the true matrices driving this business have become radically clear in a very short time frame.
“If you add to that the ever-increasing complexity of customer requirements, and the more complex and demanding regulatory requirements, you find the sort of environment in which people have to revisit in a radical fashion and you understand why and in what way they are in this business,” he says.
“Smaller or regional banks have to take a position and make a judgement whether they have the strength of the client base, and then find someone who can provide first-class service. Most banks will need customer-facing units and then buy the product from global providers.”
Scale business
As a result of the outsourcing of cash management to banks, this has increasingly become a scale business out of the reach of niche players. In the money market fund business alone, some $100bn in assets is held in Europe, an almost negligible sum when compared with the $2,500bn that has been channelled into US funds.
Corporate customers are not looking to local or regional banks to service their cash management needs. Their strategies are on a pan-regional scale, with the Americas, Europe and Asia Pacific as the three main areas of operation.
At the same time, these companies are scaling back on the number of bank relationships that they hold in any one country or region. Instead, they consolidate their banking with a preferred supplier, and the scramble is on by a diminishing universe of banks to corner this business.
Institutions with investment banking capabilities, in particular, see this as a worthwhile investment in terms of using cash management as a wedge in the corporate door in these lean times.
There is an intrinsic link between payments and cash management on the one hand, and treasury, debt capital markets and investment banking on the other.
This is one of the factors behind a sharp increase in competition among the major cash management providers. A lot of corporates around the time of the introduction of the euro chose to revisit their treasury models and look at how they managed their cash.
A lot of these companies decided to put their treasury operations out for tender, but even more have yet to do so, and there is a scramble on by the global players to get these corporate mandates.
Events at JPMorgan
JPMorgan is coming through the final stages of a merger with Bank One. One of the dynamics of the merger is the union of two different client portfolios.
The relevance for the cash management business is that JPMorgan is ranked as the world’s largest correspondent bank. So within its payments and cash management business, the group has been providing a wide variety of services to other banks.
The bank has built a mandate that gives it 25% of the CHIPS and FedWire market share. “We currently achieve STP rates of about 98% for financial institutions in the US and 93% in Europe,” says John Hazlewood, vice-president for JPMorgan treasury services.
“It’s a very automated, high- volume, straight-through environment. On the corporate side we have a different solution. They don’t necessarily have the same volumes as banks, so the value we bring to the table is to provide them with proprietary communication methodologies and more structured accounts arrangements to help them with their liquidity management,” Mr Hazlewood says.
“On the Bank One side, they are particularly active in the US middle market, and that presents a different set of challenges. They offer a lot of over-the-counter services, and we’re very dependent on partner bank arrangements in different countries to support that.”
Mr Hazlewood adds: “With regional banks, there is an opportunity to develop a slightly higher margin service provision. A lot of them don’t have the infrastructure of large global banks. We’ve had good experience outsourcing certain back-office functions.”
