Changing Dynamics Between Banks and Corporates

Published: March 21, 2000

Changing Dynamics Between Banks and Corporates
Michael Burkie
Market Development Manager, Treasury Services EMEA, The Bank of New York Mellon

by Michael Burkie, Market Development Manager, BNY Mellon Treasury Services EMEA

The financial crisis has acted as a wake-up call for many corporates. While the days of free-flowing credit meant inefficiencies in long-standing working capital and risk management systems and practices could be ignored, this is no longer the case. Certainly, credit constraints mean that these processes, which were previously upstaged by more strategic activities (such as M&A), are now in the spotlight.

Another area under scrutiny is the strategic role treasury departments can play – including their expansion to include responsibility for bottom-line improvement (as well as identifying solutions to daily cash-management challenges, improving internal data control and meeting compliance requirements).

Given both these developments, now is the time for finance and treasury professionals to have their views heard at board-level. In doing so, they will play a major part in driving their organisation towards its goals. And as a first step towards doing this, many corporates are reassessing their banking relationships, and culling those that fail to deliver.

“The days of simply hoping for the best are over,” says Eurotak’s Radomski. “We need clarity and transparency from our banks to fully understand exactly what we are getting from our banking relationships.”

The importance of insight

As the abundance of liquidity kept the cogs of commerce turning, it also oiled the unspoken agreement that bank-corporate transactions would continue. However, as banks are no longer the primary liquidity providers they once were, and cash pools have dried up, relationships can no longer be built purely on funding. Instead, corporates are judging their bank relationships on the banks’ abilities to meet their present and future needs. And for the foreseeable future this means timely information that can be utilised at all levels of the company.

Certainly, discerning CFOs realise that in order to make accurate assessments of funding, liquidity and counterparty risk, they need a deeper understanding of external market drivers, as well as the internal business processes that can be gleaned from a simple credit report. This means that their banks must now help them bridge the divide between the treasury/finance department and their business processes.

“Treasury has been in its ivory tower for too long,” says Radomski. “Banks need to help treasurers erase the lines between the treasury department and business processes. In doing this, we can upgrade the strategic impact of treasury.” 

In addition, banks need to present the collected information to CFOs holistically, rather than in an edited version that plays to the merits of the various products that banks may have to sell. To give an example, counterparty risk is viewed and assessed differently from business and credit perspectives, and banks need to understand this – and indeed demonstrate their understanding – by having and using the necessary technology to manage data to evaluate risk in line with these different perspectives.

Yet technology, though undeniably important, is not a solution in itself: 

“Banks need to understand both the necessity of insight and importance of comprehensive strategy,” says Radomski. “Solutions come from understanding, and technology should be used to aid and enhance that.”

Certainly, the prevalence of technology means that it is no longer a differentiator between banks and therefore cannot independently add value. As a result, banks can no longer consider IT-based product offerings a job well done. Value now comes from the provision of strategic and comprehensive solutions, which means interacting with outside third-party providers to combine business practice and process advisory services with bespoke treasury and transaction banking solutions that both meet the specific needs of corporates’ local markets and are conducive to reaching the end-goals of individual organisations.[[[PAGE]]]

Value-based relationships

For the majority of banks – particularly smaller and emerging market organisations – providing such solutions, which present a move from standardised, off-the-shelf products, is no mean feat. As banks struggle to reconcile the rising costs of regulatory compliance with the decreasing revenue streams of non-core activities – such as working capital management – adding value for corporates in such a comprehensive manner is simply out of reach.Indeed, even the traditional options available to smaller banks – such as outsourcing – are no longer viable, as they are tactical rather than strategic in nature. While outsourcing can provide smaller banks with the necessary technology, this alone is no longer the answer and outsourcing rarely offers the flexibility required to tailor solutions. 

With this in mind, a potential solution for banks wishing to maintain and expand their corporate relationships is a form of local-global bank collaboration that BNY Mellon calls the ‘manufacturer-distributor’ model. 

This model is predicated on the concept of local financial institutions, ‘distributors’, leveraging the global transaction processing capabilities and extensive geographical reach of specialist ‘manufacturer’ institutions, which serves to combine local touch and global reach with economies of scale. 

From the local bank perspective, the ability to aid corporate expansion into new markets and help revenue-growth can result in the retention and indeed expansion of corporate relationships, as well as the generation of internal cost efficiencies.

From a corporate client perspective, the strength of this model is that it is based on – and results in – a greater focus on their needs, which has been missing from banking in recent years:“Reciprocity is key for today’s bank-corporate relationships,” says Radomski. “Relationships have to work both ways, with shared knowledge, shared understanding and the delivery of solutions, not ‘product pushing’”.  

Reciprocity is key for today’s bank-corporate relationships.

Certainly, the fundamental corporate needs – for example, working capital management, accounts payable/receivable, financial integration, are too often viewed as disjointed processes. To create real value, corporates now need these services to be offered holistically and in line with their market needs and drivers. The manufacturer-distributor model can meet this requirement by providing a combination of manufacturer-scale processing competence, local touch, global reach and flexibility. As a result, corporates gain access to enhanced risk and liquidity management services, as well as a wider pool from which to access treasury and transaction banking solutions, which increases their chances of achieving their broader treasury and business goals.Collaborative working capital partnerships can, therefore, be the key to combining local and international best-practice solutions to address key corporate concerns, as well as generate value for all stakeholders involved. Organisations that can see the value in this client-centric partnership approach, and are prepared to be broad-minded in terms of their business development, are those that will be the successes of the future.

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Article Last Updated: May 07, 2024

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