What a change a few years can make in the psyche of today’s cash management bankers. The banking community is now focused on growth initiatives rather than just on cost cutting, investment rationalisation and managing downside risk. While the optimism that accompanies such a period of growth is welcome, it raises the question of whether the sector could be at the top of the business cycle and potentially heading for a downturn in the near future.
Cash management, and the payment industry in general, often follows the ups and downs of the business cycle. When economies are growing, free trade is flourishing and central banks are gradually raising interest rates, the bottom lines in the payments industry tend to grow nicely. When economies are stagnating or shrinking, trade flounders and central banks lower interest rates to revive moribund economies, the business becomes less attractive. Now that the overall focus is on growth, could it be that the anticyclical point of view – that the industry should be preparing for the worst – is the correct one?
What is driving the agenda?
To test this theory and to gauge the overall health of the cash management business, Deutsche Bank informally surveyed bankers from around the world to ascertain what is on their agenda for the next 12 to 24 months. The results of the survey demonstrated that the industry is focused on growing the top line of the business, but the cost consciousness that has evolved over the past few years has not yet been lost. The fact that market consolidation and increased regulatory concerns are still so high profile is also a healthy sign that sensible business management is driving the agenda. So, although it is impossible to call a top of any business cycle until well past its peak, it seems that a solid period of growth is continuing.
This should hold true as long as the individual banks surveyed remain true to business models that work for the strengths, weaknesses and overall positioning of their business. By maintaining healthy business models, when the tide is rising, the market flourishes. With unhealthy business models, a shrinking tide exposes flaws that should have been addressed when times were good.
In the past few months, Deutsche Bank informally surveyed numerous heads of payments/cash management, heads of international departments, and heads of correspondent banking at financial institutions around the world to get a better insight into what is driving their agenda specific to financial institutions’ payments and cash management business (see box 1 below for survey results).
Enabling success
Conducting this survey prompts a brief review of Deutsche’s own business model for cash management services on offer to financial institutions. The core objective is to enable clients to successfully accomplish their goals, be they growth, cost cutting, or managing regulations.
But how does the bank set about achieving these goals? Its philosophy is based on maintaining customer focus while making use of scale advantage wherever possible. While Deutsche has globalised payments, customer services, information reporting and liquidity platforms, the bank has retained key elements in local markets – sales and distribution as well as local high-quality customer support, often in local language and through local offices around the world.
Product development takes place primarily at the bank’s hubs in Frankfurt, New York and London. As the payment platforms continue to globalise, Deutsche can immediately take an offering for one currency, such as the euro, and apply it across other currencies, such as the US dollar.
At the same time, Deutsche is focused on growth within a cost-conscious environment. Its model of scale-driven platforms and operational procedures, plus a distributed client base, allows it to grow with its clients while maintaining strict controls on the overall cost of product delivery.
The success of this business model is reflected in the massive increase in Deutsche Bank’s payment volumes over the past eight years. The graph (above) shows the bank’s euro commercial payment volumes juxtaposed with its euro straight-through processing (STP) rate. The sizeable improvement of the latter from a low of about 50% in 1998 to a recent high of 92% kick-started in 2002 with the implementation of new processing technology, including artificial intelligence and continuous work to improve the efficiency of operations. This enabled the bank to aggressively ramp-up its euro volumes, from an index of 100 in January 1998 to about 800 in May 2006, a compound annual growth rate of 30%.
The impressive achievement in volume growth is a testimony of banks around the world choosing to consolidate the bulk of their euro payments with a single global provider. Deutsche Bank has positioned itself as the provider of choice in this ongoing consolidation process. Importantly, this has also enabled our customers to achieve their goals.
Controlled growth ahead
Focused growth opportunities for cash management banks should appear in the next few years, providing the banks maintain good business focus and cost discipline. Staying true to a business model, as a local, regional or global bank, may be the predetermining success factor. Market changes due to consolidation will have to be managed. Increasing regulatory concerns, such as the Single Euro Payments Area (Sepa) for European banks and increased know-your-customer and anti-money laundering requirements for all institutions, will need constant attention.
Based upon the survey results and Deutsche Bank's own experiences, it appears that we are in a sweet-spot of the business cycle for cash management, with growth on the agenda but cost-consciousness and rational decision making processes firmly in place. Growth is important, but managing the overall business and managing the bottom line is critical. Investment decisions to enhance growth are currently firmly rooted in reality.
Financial institutions clients are critically important to Deutsche Bank's cash management business. Supporting them in their strategic initiatives, whether those initiatives are for growth, cost cutting, or regulatory concerns, is essential.
Paul Camp is global head, cash management – financial institutions at Deutsche Bank.
BOX 1: SUMMARY OF SURVEY RESULTS
What is driving the agenda specific to financial institutions’ cash management according to survey participants? Domestic market consolidation and increased regulation was the most oft-cited factor affecting the cash management business of participants, and also the item over which participants felt they had the least control. Banking markets around the world continue to consolidate, but surveyed business managers felt that they had little control over the outcome of this consolidation, and could not concretely plan for possible changes in their business landscape.
Respondents from around the world cited increased regulatory pressures. European institutions considered this pressure to come mostly from the Single Euro Payments Area (Sepa) regulations.
The survey results and anecdotal evidence indicate growth as a key issue for cash management bankers – this year’s SIBOS theme is ‘Raising Ambitions’. Both market expansion and product line expansion offer growth opportunities within cash management, according to survey participants.
As for new markets, European and Asian bankers tended to focus on the ‘near-abroad’, generally preferring markets that are not only growing foreign economies, but also not too far from home. Only China was frequently mentioned – top three or higher – by both Europeans and Asians.
Proximity was also the key consideration regarding the Middle East, as Europeans tended to focus on north Africa and MENA in general, while Asians focused more on Gulf countries. Participants generally had sound business reasons for international expansion, following customers and pursuing known business flows while at the same time working within the overall strategic direction of their bank.
When it comes to new product development, banks seem to be approaching investment decisions wisely. Survey participants’ top priorities were closely tied to making more from existing relationships – a lower risk, and often less costly, avenue of growth than attracting new clients.
While drawing clients was cited, most survey participants were aware of the fact that acquiring new clients is more expensive and takes more time than gaining wallet share from existing clients and/or cross-selling additional services to those clients. Overall, it appears that growth is high on the agenda, but it is rational growth based on sound business decisions.
In addition, improving and rationalising systems, platforms, operations and cost containment were mentioned as priorities. The same informal survey conducted two or three years ago would probably have produced very different results; these two priorities would have been at the top of the list rather than at the bottom. But the fact that they are still mentioned as important is positive – if costs and investment payouts were no longer priorities then the industry really would be at the top of the business cycle. Based on the survey data, it appears that is not yet the case.
BOX 2: PROVIDING SCALE AND SERVICE IN GLOBAL PAYMENTS
Lester Owens, global head of payment and trade services operations at Deutsche Bank, looks at best-practice solutions for managing global payments as a key component to managing his business.
Providing best-of-breed solutions is evermore important in the payments arena, as clients increasingly demand better service at lower costs, but few institutions have the scale and drive to achieve state-of-the art systems and infrastructures. Deutsche Bank is one such institution. After a number of years of substantial investment coming out of the group’s market-leading payments franchise, Deutsche Bank is now positioned to provide exceptional product solutions, and transparency related to service delivery for global payments management.
Through the deployment of global technology platforms as an enabler for change coupled with its global operating model, Deutsche Bank has been able to roll out high-quality solutions across the payments value chain, from customer service (through Deutsche Bank’s real-time customer service investigation and inquiry system, db-cinq), to messaging (with the group’s messaging architecture platform GMA), to its payment platforms, including cutting-edge high-value payments system Money Transfer New Architecture.
Customer service is always a key element of any such offering, and Deutsche Bank aims to provide customer service according to a clients’ preferences, including standard queries, handled by the global hubs; self-help and self-resolution online via db-cinq; local language queries via telephone to local Deutsche Bank offices around the world, with the same global access to systems available in more than 50 countries.
What distinguishes Deutsche Bank is its ability to provide clients with full transparency regardless of currency. Deutsche Bank takes a global approach to its business, with high-value payments operations in four locations: New York, Frankfurt, Dublin and Bangalore. Taking advantage of the scale of its high-value and low-value global payments business, Deutsche Bank offers solutions to enable business enhancement via scale while at the same time augmenting quality of service.
