Collaboration for Competitive Advantage
by Michael Spiegel, Managing Director, Global Head of Trade Finance and Cash Management Corporates, Deutsche Bank
As the treasury community converges on this autumn’s events: Sibos in Boston, EuroFinance in Budapest and Shanghai, and the AFP Conference in Washington, we are reminded of the ever-increasing significance of globalisation, with its varying implications. Distribution models are changing as urbanisation and eCommerce develop strongly, supply chains are becoming longer and more complex, and corporations of all sizes are adapting their organisational models to meet these changing demands.
Globalisation is not a new phenomenon, and treasury departments of multinational corporations have long developed sophisticated skills, treasury organisations, policies, procedures and technology infrastructures to support their global business. In the past, many have adopted the ’80:20’ rule, achieving considerable success in optimising cash, liquidity and risk management in core regions from which the majority of revenue is derived, while the more challenging markets in Asia, Latin America and Africa where flows have been less material has been a lower priority.
All this is now changing. Competitive pressures, lending constraints for banks and the growing importance of working capital means that every dollar is important, wherever it is in the world. Furthermore, markets that have historically been referred to as ‘emerging’ are becoming core growth markets, so it is becoming more important to identify and implement effective cash, treasury and risk management strategies. However, given that exchange controls, liquidity restrictions and diversity across markets can make it challenging, and at times impossible, to replicate familiar cash and liquidity management techniques, there is a growing need for a new generation of treasury strategies and solutions.
Two of the key characteristics of the new, post-crisis regulatory environment are firstly, counterparty risk, which is more important than ever; secondly, new capital requirements for banks that make lending relationships increasingly important as a criterion for corporates’ choice of cash management banks. In the past, many banks were jostling for position as their customers’ global cash management banking partner. Today, customers are far more likely to select ‘best in class’ transaction banks from their lending panel by region or country. While there are a number of advantages in this approach, an important challenge to overcome is the risk that cash and liquidity management could become fragmented. While technology is an enabler to avoid this fragmentation, such as multi-bank connectivity via SWIFT, standardisation using XML ISO 20022 formats and global treasury management systems, corporate treasurers increasingly demand that their banks work together to meet the global needs of their customers more effectively. This could include, for example, consensus on the use of ISO 20022 standards, but this just one step towards greater collaboration between banks.
Collaboration between competitors is a challenging concept in principle but can in practice largely be overcome, particularly given the particular advantages. As customers will inevitably select more than one cash management bank, there is no competitive advantage to be achieved from operating in isolation. In fact, the opposite may be the case given that collaboration is in the best interest of the client. As client demands become more sophisticated and geographically diverse, technology requirements to support changing delivery models are growing and the cost of regulatory compliance continues to increase, the drivers of collaboration have never been more compelling.
Paradoxically, by developing economies of scale, and sharing the costs that are essential simply to do business in today’s global transaction banking environment, banks are in a better position to compete in areas in which they can offer genuine value, and potentially competitive differentiation, with their clients. For example, given that some aspects of cash and trade have become largely commoditised, and the transactional capabilities offered by leading banks are comparable, banks such as Deutsche Bank differentiate their offering by acting as a partner and adviser to their clients, understanding their needs and recommending, designing, implementing and supporting solutions that will deliver strategic and operational value.
Clients expect their banks to be flexible and demonstrate a willingness to adapt to their evolving business strategies and cushion their business from the impact of a changing macreconomic environment. Ultimately, to be successful, understanding and responding to clients’ needs must be at the core of every bank’s strategy. This may lead to new business paradigms and delivery models that, while differing considerably from those of the past, create new opportunities for clients in the future.