Changing Times for Corporate Cash Management

Published: May 01, 2009

Changing Times for Corporate Cash Management
Marilyn Spearing
Global Head of Trade Finance and Cash Management Corporates at Deutsche Bank

The ongoing economic turmoil has led to rapid developments in treasury and cash management. Banks and their corporate clients need to stay abreast of developments to ensure they emerge from the crisis unscathed, says Marilyn Spearing, Deutsche Bank’s Head of Cash Management Corporates.

The past year has presented some unprecedented challenges for both banks and their corporate clients. Difficulties in obtaining short-term liquidity following the start of a global downturn have painted a very bleak picture indeed. However, the changing – and at times unpredictable – conditions have taught some important lessons to banks and corporates. And those that come out of the current crisis unscathed should find that they emerge well-placed to make the best of improved conditions.

Corporate concerns

Of course, one of the main areas for corporate concern during a period such as this will be efficient cash management. As short-term liquidity funding becomes difficult to obtain and the broader economic climate impacts turnover, making best use of cash balances and minimising external borrowing may make a life or death difference for some corporates. As a result, we have observed a “back to basics” approach in many corporate treasuries.

Key themes here have been a focus on maintaining day-to-day liquidity – ensuring, at the most basic level that corporates can continue to transact – and squeezing efficiencies from the most essential of processes. Unfortunately, one downside of an extended run of favourable conditions is that there may have been a lack of impetus to address processes and structures where small efficiencies could be yielded.

Another repercussion of the events of the past year has been an increased focus of the role of the treasurer. As short-term liquidity has become a pressing concern, the treasurer’s voice is increasingly becoming heard at board level. As a consequence, transaction banking practitioners are also making their voices heard at this level, allowing advice to be delivered to an audience that may have only recently had their attention drawn to the minutiae of this field. A related side-effect has been that relationships between banks and corporate clients have become closer and more open than ever before. Due to the turmoil in banking circles, corporates are understandably seeking reassurance by taking a greater interest in the business models of their banking partners.

In terms of the specific products, services and solutions demanded by clients, we have seen some notable shifts in emphasis, as well as the continuation of several themes that were apparent before the current crisis struck. Of course, efficient day-to-day cash management has become one of the priorities and this has led to a surge in demand for solutions – such as cash concentration, sweeping and pooling – that make the best use of internal liquidity within a group and minimise reliance on external borrowing. And in addition to the focus on liquidity and working capital, addressing the risks inherent in trading and making transactions is also at the top of the agenda.

An increasing awareness that growth and stability also depend upon the financial health of trading partners, coupled with the continued shift away from traditional forms of trade risk mitigation, have spurred the growth of interest in solutions that recognise these interdependences and take a partnership approach towards the financial supply chain. For example, supplier finance, where buying and supplying corporates share information and lever competitive advantage in order to extend payment terms and keep funding costs to a minimum, is an area continuing to show strong growth. 

Financial supply chain management is an area that cuts across the traditional divides between cash management and trade finance. Indeed, the move away from these silos within banks had been driven by the needs of corporate clients seeking integrated solutions that add value in terms of liquidity management, risk mitigation and process efficiency. And it would be foolish for banks to maintain a divide between two aspects of their provision where – from the client’s point of view – they form part of a single integrated requirement.[[[PAGE]]]

 

The impact on banks

Aside from the impact of having to adapt to changing client needs during this period of economic uncertainty, the events of 2008 have had a profound effect on transaction banking in its own right. Indeed, transaction services have been one of the few recent success stories for banks, offering stable, low-risk revenue streams at a time when other areas may be struggling.

Relationships between banks and corporate clients have become closer and more open than ever before.

Even in this context, Deutsche Bank’s Global Transaction Banking (GTB) fared particularly well in 2008 and is, we feel, well placed for 2009. The much talked of “flight to quality” has certainly benefited those banks whose brands have remained strong throughout the economic turmoil. Indeed, an accompanying trend has been a “flight to security” in cash management, with many corporates understandably becoming nervous about the solidity of their banking partners and taking a much closer interest in exactly who is holding their cash balances.

Aside from a strong brand, there are several other factors that reflect well upon GTB’s current position. Significant investment in IT platforms was completed before the crisis struck and maintaining the availability and reliability of systems during leaner times will be crucial for many clients. Of course, budgets for internal investment of this type are likely to have been significantly curtailed in many institutions. And the level of IT investment required also means that barriers to entry into transaction banking are high, further benefiting the established players in this sector.

Another differentiating factor between banks at present is that those that avoid taking state aid in the form of tax payers’ money will enjoy greater operational freedom. Banks in receipt of state support are likely to be under pressure to direct investment towards their domestic markets, while those who remain totally independent are under no such obligations and will be more able to direct investment internationally, in line with the needs and aspirations of their corporate clients.

In terms of strategy for 2009, innovation will continue to be a hallmark. While the worst of the crisis may well be over, the continued downturn and upcoming regulatory changes mean that 2009 will certainly present challenges to many current ways of doing business. This means that a flexible approach to treasury and transaction services will be key and banks will have to develop new solutions and products to meet the changing needs of clients.

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Article Last Updated: May 07, 2024

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