Published: September 01, 2008
For man, autumn is a time of harvest, of gathering together
For nature, it is a time of sowing, of scattering abroad.
Edwin Teale
I chose this quote before the collapse of Lehman Bros and all that has happened since. My backdrop for the article was going to be the autumn which seems to have set in very early this year - in the UK at least (and for those who attended a very wet Sibos in Vienna). The conference season has also come around quickly again this year, the time for gathering new ideas, making new contacts and catching up with old friends. When I came back to a half-written article, a hurricane had stormed its way through the financial markets, so I thought I’d need to start again. That’s what you get for leaving things to the last minute!
However, when I looked through the quotes from our contributors and the thoughts we wanted to communicate, in fact everything still stood. While the markets and all their participants are going through changing and challenging times, the financial fundamentals remain the same - manage risk, optimise liquidity. Winners and losers will emerge over the coming months, amongst both banks and corporates. So how can treasury contribute to ensuring that the company is a winner?
The banking industry has been rocked by unprecedented turmoil in recent weeks after an already turbulent year. Politicians tell us we are entering a new era for banking in which new rules will apply. However, while investment banking will undoubtedly experience a makeover, most treasurers’ banking requirements relate primarily to credit and cash management which (in the case of cash management in particular) is more stable and less vulnerable to market fluctuations. So does this mean that corporate treasurers will see no change in the way that they work with their banking partners? I think we are already seeing substantial change, not as a short-term response to market conditions but as part of a gradual period of transformation over many months. As Catherine P. Bessant, President, Bank of America Global Product Solutions explains,
“What has made banks successful over the past ten years will be different in the 
next ten years. In particular, focusing on ‘product sell’ is not what corporates want. Furthermore, there will be less geographic centricity in banking services. Companies are being forced into thinking far more globally, which has been a real wake-up call to many companies in the United States. For example, we found that 87% of our US clients, even mid-market firms, will do at least one transaction which either starts or ends outside the US.”
Mikael Björknert, Head of Global Transaction Services, SEB agrees that there will be a greater focus on partnerships between the banks:
“Large global banks often find it difficult to really get to the heart of a client and fully appreciate their needs and aspirations. Regional banks with greater cultural appreciation and people with local experience in the market tend to find this easier. Consequently, we are increasingly finding that large banks are approaching us to leverage our customer relationships by providing global services in conjunction with the services we are already offering. This has clear advantages for our clients who can maintain their close relationship with SEB whilst benefiting from an even wider range of services globally.”
Most companies have been frustrated at some stage by banks showing a lack of understanding of their business, trying to sell products which do not have specific benefit or a ‘silo’ approach to banking across regions, so banks’ efforts to remedy these problems will be welcomed by many. This will require investment, however, and many regional and global banks are making a substantial commitment in changing the way in which they work with customers. Cathy Bessant, Bank of America continues, [[[PAGE]]]
“Increasingly, banks are taking a long-term view of the client relationship, and this is leading to changes in investment levels and priorities and the way that banks recruit and develop their staff. Many seasoned banking professionals have a rich understanding of products but less awareness of how these contribute to an overall solution for the business. At Bank of America, for example, we continue to invest heavily in high quality people and ensuring that they have the depth of knowledge that our clients increasingly rely on. We are investing $1 billion over the next four to five years in recruitment and training to enhance the quality of our clients’ experience when they work with Bank of America.”
The change in the corporate-to-bank relationship is not only driven by the banks, however, and arguably the developments which banks are making are in response to changing corporate demands. Events over the past 15 months or so have emphasised that no organisation is immune from market turbulence. Corporates are therefore being more circumspect about not only their individual choice of banking partners but also their portfolio of banks. While it might make sense from an efficiency perspective to work with one global bank, few companies can justify this in terms of risk or credit. Corporates are increasingly seeking two things which may at first glance appear to be contradictory.
Firstly, they need banking partners who can help them make their cash work harder: are you being paid on time, do you have visibility over your cash globally and are you optimising your cashflow? As Maarten Mol, Chief Executive Officer, Fortis Transaction Banking explains,
“Optimising liquidity will be an important factor in differentiating winners and losers in a difficult market. The companies with the greatest opportunity for success will be those whose banks have the expertise, tools and creativity to identify and act on opportunities to extract cashflow from within the organisation and use it effectively. In this way, the bank can be a critical business partner for their clients and pivotal to their future success.”
Cathy Bessant, Bank of America, illustrates too that treasurers are not making isolated decisions,
“As companies watch their working capital optimisation and efficiency more closely, they are making linked decisions. According to our research, around 40% of our clients link treasury decisions to other financial decisions such as debt and trade.”
Michael Burkie, Vice President, Head of Cash Management Business Development, Bank of New York Mellon agrees,
“Treasury services is one of the six pillars of Bank of New York Mellon, alongside asset management, wealth management etc. Just as our clients do not compartmentalise their business, each area of Bank of New York Mellon communicates closely to deliver solutions which may include multiple products from different parts of the bank.”
Secondly, while they want more from their banking relationships, treasurers do not want to find themselves in a situation where they cannot easily add to, or change their banking panel. In changing times, corporates need an element of independence so they can manage their banking risk more effectively. Connectivity is key to this. Many corporates have felt ‘tied’ to their banks because their technical infrastructure is so tightly connected, so their banking decisions are based largely on the difficulty of unwinding this rather than making positive decisions on the quality of banking services. The growth in corporates’ interest in connectivity to their banks via SWIFTNet emphasises their desire to select banks based on service rather than connectivity. A generic approach to connectivity means that they have the ability to select and deselect banks as appropriate. As we have discussed before, it is not necessarily a bad thing if corporates achieve technical independence from their banks: it simply means that companies are in a position to work with their banks at a more strategic level and make decisions for business reasons. As Cathy Bessant emphasises,
“Although SWIFT connectivity for corporates is becoming more important, we are finding that clients’ decisions are predominantly based on their future confidence in the longevity and stability of a potential business partner.” [[[PAGE]]]
Another thing that that corporates need to change in the way in which they work with their banks is greater attention to credit risk. Banks are monitoring their credit decisions more closely; similarly, corporates should be paying greater attention to the risk to their banks. According to the Treasurers’ Benchmark, which includes predominantly large corporates with the greatest risk to banks, many corporates have paid lip service to credit risk in the past. Today, few corporates are likely to be complacent about credit risk, but as (hopefully!) financial markets settle over the coming months, a focus on credit risk management can easily be lost as other priorities emerge. Credit risk, or perhaps we should talk more about bank risk, is about more than simply exposure limits. The Treasurers’ Benchmark illustrates that while the majority of corporates have some mechanism for measuring and limiting the exposure to individual banks, this does not take into account the full set of risks (fig 1).
For example (and purely hypothetically) what would happen to payments made through a bank which had not yet reached their destination at the point that a bank failed? What would happen to collections which had not yet reached you? What about cash held in bank accounts, as well as those held in deposits and other instruments? These elements are rarely included in companies’ calculation of bank risk. Furthermore, how seriously are exposure calculations taken into account in a company’s financial decision-making? Again according to the Treasurers’ Benchmark, only 55% of companies produced limit reporting (and, it should be noted, all participants had annual turnover exceeding $4 billion). If a limit is breached, in most cases, this is not remedied but the breach may be alerted to management for approval is picked up in exception reporting. In very few cases (less than 5%) is a limit breach a disciplinary matter.
Optimising liquidity will be an important factor in differentiating winners and losers.
Perhaps treasurers have taken the view that the risk of bank failure is too small to justify substantial resource in managing it. The issue is rarely one of technology - most of the major treasury management systems provide better bank risk management tools than their users are taking advantage of. Whatever the reasons, this is certainly an area on which corporates should be focusing.
Linked to this is the issue of investment. In such a volatile market, where is cash safe? The investment in government debt has rocketed and large amounts of cash have been taken out of US mutual funds. In Europe, IMMFA AAA-rated, constant NAV money market funds are a highly secure investment option, but market turbulence makes every investor fearful. Is the answer to place all money on deposit? Bearing in mind the limitations in corporate bank risk management, this is not a simple solution. The reality is that no single investment is 100% safe - the chance of financial loss may be infinitesimal, but treasurers should not be exposed more to a single institution than the company is prepared to lose. This inevitably means that treasurers need to be diversifying more, between funds and between banking counterparties. We will explore this topic more fully in the November edition (160) of TMI.
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So the banks are not bulletproof and every financial activity has an element of risk. Risk is not simply about the possibility of the seismic events we have seen in the past weeks however. In a challenging and competitive market, it also includes the risk that competitors will be managing their business more efficiently than your company and borrowing less. In SEB’s Guide to Financial Supply Chain Management in edition 159 of TMI, we saw some of the benefits of an integrated approach to cash and trade, order-to-cash and purchase-to-pay. Dominic J. Broom, Vice President, Head of Trade Services, Bank of New York Mellon, emphasises,
“A bank cannot simply install a ‘financial supply chain engine’ and expect that it will work for every corporate customer as the balance of requirements will differ between clients. We have put together our trade and cash businesses and we are working jointly to develop the efficiency of our clients’ financial supply chain. We focus our activities both by region and by industry to take into account the needs of different markets.”
Enhancing the financial supply chain is not simply about better integration between business processes, it is about being paid more quickly, having cash for longer and making better use of it. Some banks are demonstrating genuine innovation in this area, as Mikael Björknert, SEB illustrates,
“SEB has introduced a concept of the ‘SEB Value ChainTM’ in the way that we work with our clients, not only in cash management, but more widely in areas such as Trade Finance. This involves a disciplined process of evaluating and prioritising change in a systematic way with our clients to identify where the maximum benefit can be derived. This is not simply about changing the mindset of our sales and support teams, but expanding the way in which our clients identify their risks and optimise their financial processing.”
Trade finance is an area where many companies can unlock significant cashflow. After all, while many firms focus on trade documentation and the bureaucracy of the process, the fact is that the period between shipping and payment could often be reduced by 50% or 75%, freeing up working capital and increasing the predictability of cashflow. By looking at the financial supply chain from end to end, including the payments process, collections process and liquidity management between the two, treasurers can reduce competitive, operational and liquidity risk substantially with the help of the right financial partners.
A bank cannot simply install a 'financial supply chain engine' and expect that it will work for every corporate customer.
The changes to the banking landscape which are taking place are not only the effect of the past few weeks but a longer period of transformation. In reality, developments in the way that banks engage with their corporate clients and the services they offer have the potential to be highly beneficial for corporates. Competition will continue, which is positive in terms of choice and diversifying bank risk, but the focus amongst many banks on a more collaborative approach is also advantageous for corporates. Michael Burkie, Vice President, Head of Cash Management Business Development, Bank of New York Mellon illustrates,
“We recognise that future growth is based on collaboration at all levels. For example, we work with our customers to understand their needs across the financial supply chain, from trade through to cash and liquidity management. To satisfy their needs in this area, the trade and cash experts at Bank of New York Mellon work closely together. Another form of collaboration is that way that we work with third-party banks, in order to leverage best in class services, in the geographies in which our clients require them, under the overall banner of Bank of New York Mellon’s client service excellence.”
Cathy Bessant, Bank of America continues,
“We have reached a moment of nexus in the industry and there will be some winners and some losers. The way in which banks operate, and compete, are quite different from a year or so ago: competition and partnership both have their place and the relationship between banks is multi-faceted. Executives need to make strategic choices, and it is the strength and commitment to these choices which will equip the winners to succeed.”
The strengthening of solutions and customer service which some banks are emphasising should not make treasurers complacent, however. Bank risk is not something which should keep us awake at night, but it is part of our role as treasurers to ensure that the risks are understood and managed appropriately. Diversific-ation, implementing generic, or easily substituted connectivity wherever possible and credit risk management are all important considerations and treasurers should be using the current financial crisis as a catalyst to improve in these areas, not only for the next few months but for the longer term.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
