Dean Sposito, head of cash management for financial institutions at Deutsche Bank, talks to Charlie Corbett, economics editor at The Banker, about the difficulties facing the cash management industry as banks cope with ever more regulation, critical technological investment, voracious competition and shrinking margins.

Click here to view an edited video of the discussion

The participants

Charlie Corbett - Economics editor, The Banker

Dean Sposito - Head of cash management for financial institutions for Germany, Austria and central Europe, Deutsche Bank

How has your business changed as a result of the downturn?

Over the past few years there's been enormous change... Due to the regulatory environment, the business has become much more technologically driven. It has also become much more scale-driven, where we, as transaction-processing banks, need to have a low-cost, highly efficient, highly innovative environment, but we also need to pump a lot of volume into the engine. The regulatory environment has compressed margins.

What are the opportunities as a result of the downturn?

While economically we're not completely out of the water, we see a definite shift in focus back to core fundamentals. Clients are coming to us... and talking about reducing their cost base, increasing their efficiencies and opening up new revenue streams. Those are the opportunities.

Describe your average client

We have a very wide range of financial institution clients, from the largest to the very small. For the sake of the discussion, let's say our average client would be a regional, medium-sized financial institution that has a very strong client base and is very focused on its clients, but does not have the global reach nor the product reach or depth to offer a full global platform.

Watch the video 

This is an edited version of the discussion from The Banker's Exclusive Masterclass Series. Click below to view more:

Has the recent sovereign debt crisis in Europe hindered uptake of the Single Euro Payments Area (SEPA)?

SEPA [a project to integrate electronic payments across Europe] is up and running again, we should state that very clearly and very openly; volumes are increasing. What we do not see yet - and this is probably what is really missing - are national payment systems in each country abandoning their legacy infrastructure and using SEPA for their domestic payment flows. And that, I think, is the real critical point.

Do we therefore need a deadline for SEPA?

That's the critical point for the success or lack thereof of SEPA. We're going to need the national infrastructures to retire their legacy systems and join SEPA for their domestic flows. Then you're going to see a huge increase in volume.

There does not appear to be any particular political will to get SEPA up and running, does there?

I do think there's a will there, but I also think we're at a stage where governments clearly have other priorities... the global recession, now the issue with the sovereign debt and austerity measures - you have so many issues at the moment.

Thousands of smaller and medium-sized regional banks are generally unwilling to sign up to SEPA, are they not?

I think when you speak with the institutions, or even with corporates or insurance companies, intellectually they get it [the need for SEPA]. They understand the model, they understand the concept, they sign up to the concept of a single payments area, opening up cross-border competition and making payments easier for consumers. Yet, if they really have to choose between investment A and investment B, as long as [SEPA has] not actually been given a deadline, they won't sign up to it.

Do you think perhaps there is too much regulation now?

For myself, as a transaction banker, wanting to push the business forward and create solutions for our client base, regulation has not taken our focus away from that, but we've had to put a lot of energy into just maintaining [compliance with] the regulations.

So I would probably say there is a bit too much regulation. But if, looking [back] years down the road, we ask "was it a good thing [to have so much regulation]?", I think perhaps we're going to say it had to be done somehow for the European market environment.

What about the Payment Services Directive (PSD)?

That's really a very big issue and something that has required significant investment and has really cut into banks' bottom lines in their transactions.

The Payments Services Directive [a Europe-wide payment harmonisation initiative] has to be written into national banking law within the EU and within the European Economic Area. You have the issue there that each country doesn't write it exactly the same way into its national banking law, so again you don't have a completely homogenous environment; you have a bit of a heterogeneous environment where not each country is exactly parallel.

How has the competitive landscape changed over the past few years?

You have certain institutions that are signing on to the flavour of the day - cash management - and saying: "We want a stable business and an annuity flow that gets a bit away from the volatility around certain other banking services. Let's go gung-ho into transaction processing." But I think there's a very high barrier to entry: it is an enormous amount of investment.

You also have a lot of institutions that are coming to us almost resigning themselves to saying: "Look, we want to be core to our clients, that's what our business model is, but we realise that, at the back end, we just don't have the volume, we don't have the stomach really for the investment, so can we partner?" I think we're going to see more of that.

More partnership but also perhaps consolidation?

There is consolidation happening; you have the real big players now. Globally speaking, however, it is still very fragmented. Transaction processing globally is a very fragmented industry.

Banks need to have global reach as well. Is that another difficulty?

That's a big challenge for these local and regional medium-sized banks. Their client base is globalising; they need to try to accompany their client base but frankly they can't really do it. So those are the discussions where we say: "We want to enable your success vis-à-vis your client. You have the solid relationship with your client, so let's partner together and we'll give you the channels into the global side."

What is your strategy in Asia?

You have to look at our model in two ways. On the one side, we have cash management for financial institutions. We have a decentralised sales force, so we have colleagues in Hong Kong, Tokyo and Singapore who are selling to Asian clients, but selling our central processing hubs - our euro processing and our dollar processing through New York.

On the corporate side, we have a very large footprint [in Asia] and also offer local currency services. There you have two main trends: there is one trend of [big] European companies that have gone global; we accompany them into these Asian countries and work with them there. There is also another trend of Asian companies going global and coming to Europe.

If you were to develop a CV for the perfect cash-management banker of the future, what qualities would such a person need to stay ahead in this game?

In the past I would have said you needed a strong generalist, someone who is well educated, obviously client-focused, very aware of economic issues and able to work with the client; the demand in terms of technical know-how was less. Nowadays, I would say [the candidate would need] strong client orientation but also technical know-how. Now you really need to be able to talk channels, formats and technical infrastructures on different services to meet different needs. It really has become more complicated, but extremely interesting.

Is Deutsche Bank taking the global remittance business seriously?

Yes. That was definitely an area that banks were slow to get into. I think on the one hand maybe we missed the curve a little and it was largely [a business dominated by] the money-transfer operators. On the other side, of course, there was also big resistance from banks due to the compliance aspect: you have to have very strong due diligence.

The migrants of yesterday are the successful employees of today and are very hard-working, career-oriented, successful individuals who are still, however, sending money home to their families. That's obviously a target market that we'd like to capture. We're quite well positioned due to our 8% equity stake in EuroGiro, one of the largest cross-border payment systems linking the postal agencies.

What is the biggest priority for a bank such as Deutsche Bank looking ahead, in terms of cash management?

If I look back over the past 15 years, all of the major and best services we've developed have been due to our direct interactions with clients. And that remains the core of our strategy and the key to our success today and in the future.

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