Banks and their corporate clients are investing heavily in new technology in the cash management sphere, bringing mutual benefits, and they increasingly share the same aims of rationalisation and globalisation. Jules Stewart reports.
Cash management is becoming a more complex and sophisticated business that is moving faster towards the globalisation of the needs of bank clients. Corporates are increasingly taking a proactive part in this business by making heavy investments in their own treasury systems and efficiency gains to unlock their full synergies. Many large companies are in turn taking their lead from the new technology that banks are putting in place. The aim is to replicate the processes and approaches of their service providers. This is gradually bringing together the needs of the corporate and financial institutions worlds, and the result is that to serve corporate customers effectively, banks need to be able to offer a multi-location, multi-entity and multi-currency approach.
Andrew England, head of product management, global transaction banking at Deutsche Bank, points out that large corporates have been focused for a long time on trying to do the same thing as banks: to rationalise their structures, centralise their activities, leverage centres of competence, and focus on shared service centres and payments factories, all of which is very much payments driven.
“We’re seeing this extending into a wider interest in procurement, an interest in extracting more benefits,” he says. “On the receivables side, there is a lot more discussion with a handful of large corporates about seeking better ways to manage the collections business, and with that goes the question of bringing money faster into the corporation, improving ratios, reducing interest expense and risk, as well as streamlining processes and taking out operational inefficiencies.”
Collection platform
Banks are looking at this as a key collection platform to receive invoices and payments files, as well as data that enables them to do powerful things for clients, such as matching against invoices, running data around the predictability of the receipt of certain items, and supporting short-term forecasting.
“For a number of years corporates took the lead in cash management, which was seen as a poor man’s business in the banking environment,” says Tony White, development director at Wall Street Systems. “However, over the past few years, there has been more requirement from banks for solutions that traditionally were in place at corporates.”
The forecasting issue highlights the concern of many corporates about tracking their cash flow and, although there has been considerable improvement in this area, accuracy is generally still only good within the first couple of days.
“In spite of the fact that they have rolled out quite expensive enterprise resource planning (ERP) systems, they are still in a situation where they sometimes lack the information they need to manage their liquidity as effectively as possible, so they are looking to consolidate their accounts with major transaction banks to get the right level of information and flexibility,” says Ann Cairns, CEO of transaction banking at ABN AMRO.
The ERP movement is making significant inroads into reducing companies’ cost of inventory. The system has demonstrated that, with better supply chain management, a corporate can reduce the uncertainties that encourage hedging through higher stockholdings and consequently reduce the cost of stockholding itself.
Another trend that Ms Cairns identifies in the corporate universe is a huge increase in the use of credit cards on the commercial side of the business. “This has been growing for quite a while in North America, where corporates are using company credit cards for procurement and the low-end payments side, and their own customers are paying them by credit card, driven by the advent of the internet,” she says.
“This is where you see companies such as First Data Corp working with banks like ABN AMRO to provide global credit card acquiring capabilities, with which they can offer corporates a single solution to collect their receivables by credit card across countries around the world,” she says.
“The big change in the US was ‘Check 21’, which was an idea to dematerialise the paper in the market. This will perpetuate cheques, because it allows banks to scan cheques and send digitised images.”
Global processing
ABN AMRO recently teamed up with First Data to provide global payment processing, an agreement that allows corporates worldwide to accept card payments in many major currencies. First Data will deliver global payment processing services to corporates and ABN AMRO will offer these customers access, through its global transaction banking network, to card and payment systems and banking services in Europe, Asia Pacific and Latin America.
This is one way in which service providers are leveraging their global presence, scale and payments expertise through a third party’s processing capabilities platforms for the benefit of a mutual client base.
Richard Moseley, head of corporates for global transaction banking at HSBC, says that cash management trends are different in the more developed markets versus the emerging markets. “It’s quite interesting that the emerging markets are leap-frogging some of the more mature markets because they are in the fortunate position of having very little, if any, legacy infrastructure, which is an obstacle to moving forward,” he says. “That applies to the retail payments side as well as commercial corporate side and higher value transactions.”
Going digital
One of the most important trends in the past few years has been the move from paper to digital information, which continues to grind on. “In some emerging markets, they are moving very quickly towards that, while in other more mature markets there is a lot of infrastructure associated with cheques and cash,” says Mr Moseley. “The consequence is that people are focusing more on what you can do with the information that suddenly becomes available by the underlying payment being digitised.”
The great advantage is that the more data is digitised, the easier it is for a corporate to ensure that it can use that data without having to re-enter it to make its own internal processes more efficient. “Therefore the trend is from paper to digitisation, what that means to a client and what is the value-added he can obtain from digitalised data in an easily manageable format, from a reconciliation and supply chain viewpoint,” says Mr Moseley.
“This also presents new challenges for the industry. It means ensuring that the connectivity between bank and corporate is improved and it also means that clients increasingly want a simple and consistent connectivity around the world, and certainly around the region. Clients do not want to have to build different connectivity with banks in every country.”
That is why succeeding in the global cash management business is increasingly the domain of large service providers with access to substantial capital resources. Consolidation has been one of the key industry trends and nobody doubts that it is going to continue and accelerate in the near term. Deutsche Bank’s Mr England says that the continuing pressure points are the need for a deep pocket to remain a leading player in the cash management business, as well as to respond to compliance issues that cover everything from transparency regarding know-your-customer to Basel II, Patriot Act provisions and anti-money laundering regulations. “There is also a heightened awareness of data recovery requirements, while how fast you can react to unpredictable events is driving expenditure around decisions like maintaining dual sites and backing up data,” he says.
Monetary commitment
Mr England emphasises that to stay current with the market, a financial institution needs to make a monetary commitment to remain in the business long-term and that not every player is prepared to make that investment. “We are having a lot of strategic discussions with financial institutions that we may not have been engaging in two years ago or so,” he says.
“In the interim, we have built an entire business division, the wholesale solutions market segment, around providing these financial institution clients with an outsourcing strategy that allows them to exit their own clearing systems transparently. These clients are able to leverage and white label our products; and our strategic direction is to become a processor for them by opening up our systems on a multi-legal entity basis.”
Ms Cairns highlights the fact that the advent of the Payment Services Directive will drive more consolidation in Europe. “We expect to see consolidation at the infrastructure level, for example among clearing houses to offer capabilities across different countries,” she says. “This is a big driver of change in the European market in the next year or two. This will bring changes in the cost, speed, format and the way that payments are moved around the market. The Payment Services Directive will bring uniformity, for example, of value dating.”
Industry participants agree that the regulatory framework is going to get tougher. Clients are being subjected to a lot of regulatory pressure, and they are constantly being required to sign off on information concerning their business and the transparency of their processes. This puts more focus for a provider on the management of information for these clients: banks need to look at certain risk points that clients may not be able to cope with, but which the service providers can manage on their behalf. This is not just about cash flows and credit risks, but can even cover criteria for investing short-term money.
“Any discussion about payments cannot ignore regulatory changes,” says Mr Moseley. “This is a big issue for banks and the challenge is to ensure that we are able to respond to these changes in a way that is beneficial to these requirements as well as to the client and shareholders. This requires some quite holistic thinking regarding the consequences of a change in any given regulation, rather than a knee-jerk response. We need to have a better idea of where we think the advantage is to the customer on regulation and how to demonstrate that we can extract value, rather than always viewing this as a negative change.”
