Paul Camp, global head of cash management financial institutions, global transaction banking, Deutsche Bank

Banks are under pressure to generate revenue, reduce costs and mitigate risks in the recession. At the same time, investment needs have never been higher. So which is the best way forward for banks attempting to meet client demands for cash management services?

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Marcus Sehr, head of cash management financial institutions - business management, global transaction banking, Deutsche Bank

Today, payments are the lifeblood of our globalised commercial world, affecting every walk of life from individual consumers to businesses, banks and governments, and are critical in keeping economies up and running. Most payments are not executed in physical form (cash) but via more efficient forms such as electronic transfers or cheques. And the number of transactions is increasing exponentially. According to Boston Consulting's report, Global Payments 2009, there were $805.1bn-worth of transactions in 2008, compared with $654.3bn in 2006, and this is forecast to reach $1400bn by 2016. Whereas in the past the sole focus was simply on physical settlement - goods in return for cash - today's cash management and payments industry has become far more sophisticated.

Other elements such as straight-through processing (STP), cash concentration, foreign exchange payments and timing of execution have come to the fore alongside more traditional aspects such as risk mitigation and cost reduction.

Examples of how cash management and payments might be employed by individuals include the following:

- Parents paying a child's tuition fee for college abroad via money transfer or check;

- Migrant workers remitting their salary back to their home country;

- Home owners paying for utility costs, such as electricity;

- Consumers paying at department store via direct debit to checking account.

And examples of where payments are used by businesses, governments and banks might include:

- Importers transferring money to exporter's account;

- A multinational parent company concentrating account receivables/payables in a central account;

- An investment company or mobile phone provider initiating collection of funds or receivables via direct debits;

- A government receiving tax payments or paying social benefits and financial support via money transfer;

- A bank settling a foreign exchange transaction.

For all the above examples, banks are normally required to process the transactions, as well as offer a range of value-added services. In an increasingly global environment, clients require robust and reliable cash management that offers the flexibility to cater to global, regional and local needs. While some banks offer an end-to-end range of services to manage the complexities of global cash management, others focus on their specific core competencies.

The principle cash management products are: payments or transaction solutions; cheque services; liquidity management; channel management; information and reporting services.


Processing money transfer transactions is more than simply executing payments. Today's payments products are designed to help individuals and businesses control payment prioritisation, improve efficiency of intra-day cash flows, manage complex structured payment arrangements, improve forecasting with real-time information and optimise earnings from end-of-day liquidity.

Payments can be categorised in several ways: high-value and low-value payments; urgent and non-urgent payments; and cross-border and domestic payments, although there will be overlaps among these categories. For example, a domestic payment can be urgent or non-urgent, and a cross-border payment can be high or low value. These categories have developed over time as a result of the particularities of individual countries and/or market practices.

While domestic or low-value transactions are relatively simple, high-value, urgent and cross-border payments present more complexity. But for these payment types there are many customised solutions available to fulfil a client's specific needs. Examples include:

- Priority payments: when clients require that the execution of a specific transaction takes precedence over a normal payment.

- Timed payments: allows clients to specify the exact time when a payment should be executed.

- Conditional payments: clients can instruct their banks to release specified payments only when a defined set of conditions are met. Conditional payment arrangements can support the management of complex treasury procedures and reduce risk.

- Fee structure: in the context of international payments, pricing and fee structures can sometimes lack transparency. Banks have therefore developed services such as principal preservation or guaranteed fee schemes to overcome these issues, with the aim of achieving full end-to-end transparency.

Processing optimisation is another important consideration when clearing payments. While domestic payments in most countries traditionally have high STP rates, international payments are often subject to repair due to insufficient or erroneous details. To overcome these obstacles, banks have invested in tool kits that include, for example, automated quality reports and other value-added services such as STP training for back-office staff.

Some have also invested in advanced artificial intelligence to correct common mistakes automatically, translate unqualified text into machine-readable party identifiers and select the fastest routing option for payments.

Cheque services

In a world where electronic payment technology continues to flourish, cheques remain an important payment method. Today, increased processing efficiency, enhanced fraud protection and fast access to accurate information have become the main focus. Cheque services typically comprise streamlined solutions for paper payments and receipts around the world, supporting disbursements, cash letter and collections.

Cheque disbursement services are typically used to issue cheques against a demand deposit account, and sophisticated techniques are employed to help reduce potential exposure to fraud. For example, sending details of issued items to the issuing bank allows for any cheque presented for payment to be matched against the details provided in the issuance advice.

In parallel with infra-red technology, this issue-matching procedure can determine if a cheque has been illegally altered, providing solid protection against potential fraud. A more streamlined and efficient way of dealing with cheque disbursements is the usage of Swift-to-cheque services, where a bank instructs its correspondent by MT103 to issue a cheque on its behalf and forward it directly to the beneficiary.

Regular cash letter clearing provides conditional credit with pre-agreed funds availability for a very low per-item price. However, cash letter clearing is subject to final payment, which means that items already credited to the account can be returned unpaid after period of time, depending on the country and reason. In the US, for example, a cheque may be returned for fraud up to one year after it is presented to the paying bank. These return laws lead to substantial risks for clients and their business partners.

Cheque collection, an alternative to cash letter clearing, is governed by the ICC URC522 and provides final credit except in case of fraud. Funds are only credited after final payment (after receipt of payment from the drawee bank). It can take up to several weeks until a cheque collection is paid by the drawee bank and, due to the manual handling and unpredictable drawee bank charges, the collection process is expensive compared to cash letter.

A special type of collection that combines the advantages of cash letter and collection clearing is a preferred collection service (PCS). It offers the highest safety and risk protection for cheque clearing available in the market. Under PCS credit entries are absolutely final, including cover against any fraud on the face of a cheque. Payment dates and charges are pre-agreed and fixed, making the clearing process very easy and efficient.

Liquidity management

Liquidity management services enable corporations and financial institutions to exercise better control over their cash and other liquid assets. It can also improve global working capital arrangements, across time zones and borders.

As debit balances attract high debit interest while credit balances can earn little or no credit interest, services therefore typically include cash concentration and notional pooling structures. However, consolidating cash positions across multiple subsidiaries in different countries can be challenging from a legal and regulatory perspective.

By physically centralising negative and positive balances into a single account position on a daily basis (into which surpluses are transferred and from which overdrafts are funded) overall liquidity can be improved. As a result, clients can gain greater transparency in cash forecasting by balancing out unexpected shortfalls and reducing interest charges. At the same time, greater opportunities are created for the short-term investment of any surplus funds.

If a company structure is decentralised, it may wish to implement a global treasury policy while maintaining cash management responsibility at an operating entity level. Corporates and financial institutions can optimise interest by netting balances at the group level and notional pooling solutions are designed to facilitate the management of account balances centrally without physically moving funds out of operating accounts. The integrity of each regional or local operating account is thus maintained, while benefits can be accrued from a virtual centralised liquidity management solution. Notional pooling can be combined within the framework of a global cash concentration solution to provide comprehensive overlay structures to meet the needs of even the most complex organisation.

Managing account credit balances in order to maximise the returns on surplus funds is an essential component of any liquidity management programme. However, legal restrictions may make it impossible for corporate/institutional treasurers and cash managers to apply the same investment strategy globally. Banks have therefore designed a variety of automated solutions that can satisfy global, regional and local investment needs while complying with applicable regulations.

Channel management and information reporting

In today's fast-paced markets, clients of all types need rapid access to worldwide payment information, as well as details of account balances and transactions. The main channels to access this information include Swift, which is predominately used in the interbank space, and proprietary solutions such as internet-based electronic banking systems, which are used for communication between banks and their client base.

Via an internet-based electronic banking system, clients are able to access their bank accounts and initiate payment transactions over the internet anytime, anywhere. In addition, inquiry platforms that allow clients to research and make real-time enquiries regarding payments and receipts have gained greater importance.

These platforms store transactions, instructions, messages, advices, and payment history online for several months. They also provide management information system reports, allowing clients to track enquiry types and volumes, as well as service performance.

Recent trends in the cash management industry

In recent years, a number of trends have emerged in the cash management business. Two issues in particular have forced banks to make considerable investments and develop new and innovative solutions: the increase in regulatory requirements such as anti-money laundering, together with mandatory participation in industry initiatives such as the introduction of the Single Euro Payments Area (Sepa) and Target2.

Indeed, the burden of having to comply with these initiatives has forced many banks to question whether or not they have a serious business case for continuing to offer full transaction banking services by building products and services themselves. Alternative methods of bringing cash management products and services to market by partnering or buying services from another bank have become a much more viable alternative.

While transaction banking, and in particular cash management, has proven to be particularly resilient to the recent financial crisis, one should not be fooled into thinking that this is the type of business you can simply walk into as a provider. Transaction banking is very capital intensive and with the high-level investment required just to comply with regulatory standards, the barriers to entry are significant. Volume, scale and scope are the keys to being a successful global player in this industry.

Figure 1: European countries encompassed by the Sepa initiative

Figure 1: European countries encompassed by the Sepa initiative


One of the most far-reaching and ground-breaking initiatives in recent times concerns the introduction of Sepa. In the long term, the intra-European payments landscape will essentially be borderless. It is envisaged that cashless transactions such as credit transfers, direct debits and card payments made from one Sepa country to another (see Figure 1) will be as simple, quick and cost-effective as domestic payments (see Figure 2). And for credit transfers, this has been a reality since January 28, 2008. Whereas national payment schemes have previously differed considerably, new technical standards and formats are now in use, allowing companies and consumers to make euro credit transfers across Europe under a harmonised scheme.

A similar simplification will be realised for direct debit payments by November 2009. The Sepa direct debit (SDD) is truly new as it is the first cross-border direct debit instrument. However, this transformation will not take place overnight - existing legacy national payment instruments and the Sepa scheme will co-exist over several years. The end date for this dual phase, when existing legacy national schemes will be discontinued, has not yet been fixed.

Figure 2: Difference between the pre and post Sepa environments

Figure 2: Difference between the pre and post Sepa environments

Payment Services Directive

Even more extensive than the Sepa initiative, is the introduction of the Payments Services Directive (PSD). This creates the new regulatory framework for payment services in the EU, harmonising the legal environment for all electronic payment instruments for all providers within the EU. The scope clearly goes beyond Sepa payments. The pricing, charging and information reporting requirements of the PSD will impact processing and billing systems in almost every bank in the EU. In addition to the cost of implementation, a substantial impact on EU bank's revenues can be expected as the PSD restricts beneficiary deduction, value dating and float practices for intra-EU payments regardless of payment quality. The most challenging issue in the market is finding a common understanding of the new legislation by November 2009, be it in the banking industry or in regard to the national and individual adoption process required in each EU country.

EU banks are now reviewing and adjusting end-to-end processes, charging practices and legal documentation. Beyond its immediate impact on fees and revenues, the PSD is anticipated to alter significantly the way banks evaluate their business models, revenue sources and correspondent relationships. Financial institutions will have to carefully monitor the evolution of the competitive space and build reliable long-term partnerships.


Another European industry initiative, almost running in the same investment cycle to the Sepa initiative and PSD, was the introduction of Target2, the new gross clearing system of the European System of Central Banks. This replaced the previous decentralised Target infrastructure that was formed out of the euro real-time gross settlement systems. The migration from Target to Target2 began in November 2007 and was successfully finalised in May 2008, requiring significant investment from all involved banks.


While the above are more closely related to Europe, the MT202COV is a global initiative. In January 2008, the Swift community approved the introduction of a new variant of the MT202, the MT202COV, which is intended to address the lack of transparency inherent in the current cover-and-pay model. In addition to the traditional elements of the MT202, the MT202COV variant will include details of the underlying commercial payment such as ordering customer, beneficiary and payment details. The MT202COV is scheduled for implementation with the Swift Standard Release in November 2009.

Meanwhile, banks and clearing system operators will have to evaluate the extent to which they can send, forward and receive the new message variant depending on their respective business models. In parallel, regulatory clarifications must be moved forward in a globally consistent manner to ensure smooth implementation and avoidance of market distortions.

Lack of harmonisation for cheques

Cheque usage in nearly all countries is decreasing by about 3% to 10% a year. Although there are multiple harmonisation initiatives and an increased number of regulations in the electronic payment area, there are no initiatives currently planned for cross-border harmonisation of cheque clearing regulations or the introduction of a cross-country cheque clearing system. Each country is individually looking at cheque clearing and is introducing different solutions to either improve clearing efficiency or reduce cheque usage in their local market.

Some countries (such as the US, Germany and Spain) are introducing efficient, image-based, electronic clearing schemes that avoid physical transportation of paper. Others are discouraging cheque usage in favour of electronic payments by abolishing clearing infrastructure, increasing clearing charges or other measures.


Over the past few years, banks have had to dedicate considerable attention and financial resources to mandatory risk-related projects such as Anti-Money Laundering and Know Your Customer. For example, they have had to establish detailed, bank-wide operational risk programmes to assure a robust control environment and to ensure compliance with rules, regulations, and recommendations issued by regulatory bodies such as the Financial Action Task Force on Money Laundering, the Office of Foreign Asset Control, the Bank Secrecy Act, the USA Patriot Act or the EU Regulation 1781/2006.

Impact of trends on cash and payments industry

Eighteen months ago, the overriding challenge that cash management and payment professionals were struggling with was how to achieve business growth in the face of ever increasing mandatory investment pressures. A typical question from bankers around the world would have been: "How am I supposed to grow my business - that is, make more money - when regulatory changes are forcing me to make significant new investments and, at the same time, requiring that I lower my pricing?"

A year and a half later, banks are still confronted with ongoing regulatory measures, in addition to facing a financial crisis and a severe global recession. Global trade has slumped, interest rates are at an historic all-time low and, for the first time since 1982, leading industry groups forecast that the overall market for global payment services will contract. At no other point in time have banks been under so much pressure to generate revenue, reduce costs and mitigate risks at the same time.

While the introduction of regulation such as Sepa should help to deliver on numerous promises - increased trade, better economic growth within the eurozone, more efficiency, etc - it also presents significant new challenges. To comply, the average bank has been forced to invest in new systems and technology, create and manage significant project teams and dedicate senior management attention, while dramatically reducing pricing. While from a long-term macroeconomic viewpoint this is a promising endeavour, from a microeconomic perspective it is not so beneficial - investing more to make less money.

Buy, build or partner?

This situation, coupled with the recent financial crisis, will undoubtedly accelerate consolidation in the market. When looking at the payments industry in particular, two distinct business models have emerged. On one hand, there are the leading global payment providers such as Deutsche Bank, which leverage their economies of scale and scope on a global level to actively push the consolidation process. On the other, there are regional and local banks, which are leveraging the investment made by global banks. This will allow them to focus on their core strengths, such as their deep client relationships, while also offering value added cash management products to their own retail and corporate client base.

For banks, the recent downturn added to the pressures resulting from regulatory initiatives may leave them with few options. Whereas some will look to reduce costs by forming strategic partnerships or outsourcing, others will focus on leveraging economies of scale as well as rationalising technical infrastructure and processing in order to retain profitability in this challenging environment.

Ultimately, banks will have to position themselves strategically as either a true transaction bank, such as Deutsche Bank, offering the full range of transaction banking products and services, or establish themselves as a client-driven local or regional bank in which non-core functions are carried out in the most cost-efficient manner by leveraging the product suite available from the global providers (see Figure 3).

Figure 3: Emergence of new business models

Figure 3: Emergence of new business models

A global provider

With transaction banking a core element of Deutsche Bank's overall business strategy, the introduction of mandatory or industry initiatives, while cost intensive, also represents an opportunity to strengthen the bank's position as a leading global payments provider to the benefit of both itself and its clients. Going forward, Deutsche Bank differentiates itself by offering value-added services around the entire financial supply chain, as well as high-quality payment processing and outstanding customer service.

Example I: Industry initiatives

Since January 2008, Deutsche Bank has provided Sepa clearing services for more than 100 indirect participants in virtually all Sepa countries via a dedicated pan-European platform. Deutsche Bank's solution for the SDD is built on the same platform and thus perfectly aligned to complement the existing Sepa offering, as well as the bank's global cash management and high-value payment proposition.

Whereas many banks have invested in tactical rather than strategic solutions to become Sepa compliant, it is widely acknowledged that there will be business challenges to overcome in preparing for the SDD.

Deutsche Bank has already invested in its Sepa platform so is fully ready for the next stages in the initiative. Should other banks require us to do their 'heavy lifting', we are able to offer those services. This is especially pertinent as the ramp-up period for SDD is expected to take some time so joining forces with Deutsche Bank would enable banks to avoid one-off investments and switch to a leveraged per-item structure in light of the low volumes.

Example II: Innovation - bringing new products to market

With poor market fundamentals and market profitability, the natural assumption is that many banks will cut back new product innovation. And, to a certain extent, there will be reductions across the industry. This is not healthy for the industry as a whole, and places additional importance on banks, such as Deutsche Bank, that have transaction banking as a core business and remain able to continue making investments in innovation and core systems.

Indeed, besides providing clients with guidance and offering first-class customer service, it is vital that value-added products are brought to market. Without innovation and continued investment, it is hard to see how new revenues will be generated. Global players will continue to innovate with new products such as Deutsche Bank's FX4Cash, the bank's new cross-currency payments solution that allows our client base to effect payments in more than 125 currencies via one base account.

Partnership option

In 2009, banks are under intense pressure to generate revenue, reduce costs and mitigate risks during a global recession and the aftermath of the financial crisis. Regulatory burdens have never been higher, making this even more difficult. Given such competing priorities, meeting client needs for cash management services so that banks can maintain and grow client relationships is critical. Retail and wholesale clients need cash management products - they need to be able to pay their bills, receive their salaries and engage in their daily business activities.

In assessing alternatives, local and regional financial institutions may find that partnering with the right global provider, such as Deutsche Bank, is an effective way to ensure they continue to deliver 'best in class' products and services while minimising investment costs.

At Deutsche Bank, we are committed to being the partner of choice for cash management services for financial institutions. We achieve this through innovation, continued investment, as well as providing first-class customer service and guidance to our clients.

This, in turn, helps our clients to generate revenue, reduce costs, mitigate risk and deal with regulation. Our goal is to enable our clients - regardless of the underlying currency or the respective location - to offer their retail and wholesale customers the essential services that are often taken for granted, such as making and receiving payments, managing liquidity, controlling risk - and successfully carrying out their day-to-day business.

This article was contributed by Paul Camp, global head of cash management financial institutions, global transaction banking at Deutsche Bank, and Marcus Sehr, head of cash management financial institutions - business management, global transaction banking at Deutsche Bank.


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