The End of Global Banking?
by Dick Oskam, Global Head of Sales, Transaction Services, ING
Centralisation is perhaps the most important cash management trend we have seen over the past few years, with treasury functions of all sizes and in all industries seeking to create economies of scale and standardise treasury policies, processes and technology. The Single Euro Payments Area (SEPA) has been a catalyst for these efforts through harmonised payment and collection instruments and a common legal framework across the Eurozone. It is becoming increasingly clear, however, that while efficient centralisation involves rationalising bank relationships, it does not – and should not – imply a shift to a single banking partner.
The global financial crisis emphasised the importance of diversifying bank relationships but initially, the focus of bank risk management was to protect the business from the impact of bank failure. Following recent announcements from several banks about strategic changes to their business, it has become clear that managing bank risk also involves mitigating the impact of banks’ voluntary termination of specific services or withdrawal from particular markets. Although the impact of these decisions may not be as significant as bank failure, they lead to considerable inconvenience and loss of trust amongst the clients that are affected, and the outcome is similar: namely, that treasurers need to act quickly to avoid disruption to their business.
Firstly, corporations need to have relationships with other trusted banks that offer equivalent solutions in the relevant markets. This involves keeping up to date with banks’ capabilities and maintaining a relationship with leading banks in the relevant markets. Despite the technical and legal feasibility of managing cash from a single location and even a single account, treasurers still value a local banking presence and specific expertise in each country in which they operate as highly as ever. This applies not only in countries that maintain local payment types, such as Italy, but across their footprint.
Secondly, treasurers need to look beyond their immediate migration objectives when selecting an alternative bank. While there are likely to be banks that support the company’s existing cash management requirements, treasurers also need to anticipate their longer-term needs to avoid the disruption of changing banks a second time. Treasurers therefore need to make sure that potential alternative banks have the strategic commitment, solutions, expertise and presence in key markets that they require initially, and in the foreseeable future.
For example, while we are not yet seeing the widespread use of collections on behalf of (COBO) structures in Europe, most requests for proposal now ask for solutions that facilitate COBO, such as virtual accounts, as a critical requirement. Setting up sustainable structures for clients and keeping up to date with local regulations related to COBO requires significant commitment and investment from banks, so this will increasingly become an important selection criterion.
Having decided upon an alternative bank, there may be delays and complications even if the project simply involves replicating existing cash management structures. For example, the new bank still needs to comply with know your customer (KYC) regulations and customer due diligence requirements. There have been some discussions about ‘re-using’ existing checks performed by the incumbent bank, but regulators typically will not accept this unless checks were performed within the past three months. Inevitably, this is not an easy challenge to overcome, but it is likely to be easier to migrate to banks that adopt consistent documentation across countries and have a structured approach to the legal, structural, operational and project management elements of cash management migration.
As treasurers balance the need for a rapid switch and a long-term strategic partnership, they are increasingly recognising that true global banking relationships are no longer realistic, and potentially conflict with risk management objectives. At the same time, appointing a large number of cash management banks results in fragmented liquidity and a loss of operational efficiency through multiple channels, formats and processes. Consequently, treasurers are moving towards banking partnerships with regional banks that have a proven long-term commitment to the relevant markets. For example, at ING, we pride ourselves on our strong footprint across Europe, including Central and Eastern Europe, in which we continue to invest. A regional approach enables treasurers to achieve a balance between risk management, financial and operational efficiency. At the same time, they benefit from these banks’ expertise, local and regional solutions, and proximity to subsidiaries, suppliers and customers in each country of operation.