Cash management providers used to offer corporates and banks different products and services but the launch of the euro and increasing competition have changed all that. Now cash managers are finding their clients’ requirements often overlap. Jules Stewart investigates.

Most cash management providers, who in the past would have maintained a strict divide between the products and services they offered to financial institutions and those they offered to corporates, are now seeing a blurring of the lines between the two client segments. These days, more sophisticated corporates are using cash management services for their specific requirements, such as state-of-the-art financial tools, immediate transfer facilities, access to the capital markets, and products such as derivatives and hedging instruments. The offer of these platforms is crucial to the providers.

Effect of the euro

“With the arrival of the euro, corporates are reducing the number of core banking suppliers, and on a transnational basis as well,” says Philip Middleton, head of retail banking at Ernst & Young. “For corporates, this means lower risk and ease of outsourcing. The only other solution would be to set up their own banks and have the ability to raise retail liabilities. Some companies, such as Volkswagen, have done this to leverage off their customers, while others are thinking about going down this route.”

Phillip Middleton: corporates are reducing the number of core banking suppliers

Francesca Corscadden-Hayward, head of sales for global banks and brokers at ABN AMRO, agrees that there is less differentiation between financial institutions and corporates in terms of the products and services offered to each.

“I’ve been on the financial side for 15 years, selling working capital products into banks, brokers and insurance companies,” she says. “Until recently, the products you built for corporates and financial institutions (FIs) fell into two very distinct groups. Banks bought clearing services, primarily using MT100/200 message types, with payments being made on a transaction-by-transaction basis. A corporate, on the other hand, was more inclined to buy payment services where these transactions could be bulked up and sent by file transfer, and in many cases using a host-to-host connection.”

Change of focus

Ms Corscadden-Hayward says it is no longer a question of looking at what products to sell, but of identifying what products and services banks require to remain competitive. “In many cases we’re looking at corporate client products and developing these for banks,” she says. “As an analogy, in the past you had to build two separate trains and tracks, while now you can have one train, one track, but with different carriages so passengers have more choice about where they want to sit.”

The top several hundred global corporates are finding that they have the same cash management needs as the banks. In many cases their treasury executives are former bankers, poached from dealing rooms and correspondent banking teams, so their expectations are at bank level.

“It comes as no surprise that cash management departments have been set up by major multinationals, such as Johnson & Johnson, in places like Belgium,” says Norman Bernard, director of First Consulting. “These are co-ordination centres that manage cash and the tax aspects that go with it. As consumers, they are as sophisticated as the banks. They run cash management, derivatives contracts and netting operations for the countries in which they operate. These are in-house treasury units, not banking operations for third parties.”

Ineke Bussemaker: has noted major new trends in treasury outsourcing

Developments have also been taking place in the area of outsourcing of services by corporates, as Ineke Bussemaker, global head of Citibank Agency Treasury Services, explains. “One major trend we’ve noted is treasury outsourcing,” she says. “Corporate treasuries have a commodity executional component and a strategic policy component. The commodity component can be outsourced and this is what has been taking place. In the past, it was mainly US companies outsourcing their European treasury operations. Now European companies are making more use of this.”

External influence

As for financial institution clients, external factors have had a major influence on their approach to cash management. In this respect, the launch of the euro changed the landscape forever. Banks are now looking more closely at how they manage their business; they no longer feel that they can stand still by continuing to do business in the same way as they have traditionally. They now have to respond to the requirements of Basel II and the introduction of continuous linked settlement (CLS).

Added to this is the downward pressure on revenues in the current economic environment and the increase in costs, which often requires more investment in systems.

“In the last two years, we have seen increased demand from banks to buy clearing services whereby they can significantly reduce their costs, which, especially in Euroland, is being driven by the new EU directive that came into effect on July 1, 2003,” says Ms Corscadden-Hayward. “From this date banks can no longer charge a higher fee for a euro cross-border transaction for amounts up to E12,500 than for a domestic euro payment.”

This overlap between cash management products for banks and corporates is not strictly a new phenomenon but rather a process that has been building for some time.

Deutsche Bank has been increasingly building products to service both segments as the behaviour of sophisticated corporates and banks converges with regard to message standardisation, management of liquidity, information requirements to build straight-through processing, interchangeability of partners and other areas.

“As the economics of the business becomes more complex, our strategic focus is increasingly on selling services to banks to help them support their corporate clients,” says Andrew England, head of global cash management at Deutsche Bank. “We have entered into a very different type of strategic relationship with banks to provide services for corporate clients that in the past they have provided themselves. You have to look at it as a global business, with the right infrastructure to process the global currencies on a single platform.”

Deutsche Bank’s head of market management Europe, Michael Mueller, explains that the business is being driven by the increasing sophistication of corporates, which are consolidating their operations and becoming more global in their approach. He says that huge cost pressures also contribute to these initiatives.

Two-way stream

“The blurring of the lines is at the high end of the market, since corporates using cash management solutions designed for banks need to have critical mass and purchasing power,” says Mr Mueller. “This applies particularly to corporates moving large amounts of money, such as the automotive and the oil sector. In many ways it is a two-way stream. You have large companies requesting FI services and smaller banks asking for help on the corporate side, for example, in gaining access to domestic clearing systems.”

Nevertheless, while FI and corporate client segments have been coming together, there is always likely to be a distinction in the needs of both client segments. Doug Young, relationship manager at Citigroup Global Transaction Services, says he still sees financial institutions and corporates as two distinct segments with separate buying needs. “Industries are buying different products than FI clients, which include banks, insurance companies and the like,” he says. “This is one of the reasons why we have dedicated sales teams for these different segments.”

Centralisation trend

One development he has identified over the past few months is the trend towards centralisation on the FI as well as the corporate side, driven by CLS. “Some FIs have begun to centralise their clearing agents for non-CLS eligible settlements and this initiative – coupled with the general reduction in nostro agents overall – means most FIs have far fewer providers than in the past,” he says. “We have also seen large corporates, most of which have their own in-house banks, talking about CLS.”

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