Published: October 24, 2013
Only a few years ago, companies focusing on efficiency viewed a banking structure based on a single global transaction bank as the best possible solution. In reality, multinationals might have needed to use three or four different banks in order to gain global coverage – but the consensus was very much that less is more.
In the last couple of years, this view has been turned on its head. In the current economic environment, more companies – particularly large corporations – are putting in place structures which use a larger number of banks, supported by bank-agnostic technology. This trend can be traced back to the difficulties that global banks have faced in the last few years.
Since the financial crisis began in 2008, companies have become increasingly aware of the fact that their banks represent a business risk to them – just as companies represent a business risk to their banks. As well as the risk that their deposits could be affected by the failure of a key bank, companies have also recognised that such an occurrence could affect their ability to make and receive payments, or disrupt their credit lines.
As corporations have become more sophisticated in their risk monitoring processes, companies which may have been working with a small number of providers – or indeed with a single global bank – have become increasingly concerned about those risk exposures and more proactive in monitoring and addressing them.
As a result, companies are looking for increasing flexibility in their banking relationships so that they can change providers quickly and easily if required. They are also looking to diversify their counterparty risk exposures by spreading their business across a larger number of banks.
Other factors are contributing to this trend. Where deposits are concerned, many companies have put in place counterparty limits, restricting the amount that can be invested with a particular bank and specifying the banks with which the company is willing to deposit funds. Some companies monitor these limits on a daily basis in order to track their exposures and review limits if a bank’s credit rating changes, for example. The same technique may be applied to other banking activities such as FX transactions.
Nevertheless, with companies currently holding high levels of cash, many are finding that they are reaching their counterparty limits – and are therefore more inclined to work with a larger number of banks. On the lending side, meanwhile, banks are increasingly expecting to receive a share of a company’s ancillary business as part of their lending relationship with that company.
All of these factors have prompted more companies to work with a larger group of transaction banks than they may have done in recent years. But a multi-banking strategy has its own obstacles: by working with more banks, a company risks introducing additional complexity into its banking structure.
In fact, this is not the first time that companies have tended to work with multiple banks. In 2000-2005, having a larger group of banks was standard practice for many companies, until a growing focus on efficiency and consolidation made a smaller number of banks look like a more attractive arrangement. In any case, at that time only a small handful of global banks were able to offer the strongest transaction banking capabilities, so companies with sophisticated requirements tended to concentrate their cash management business on those banks.
In the old multi-banking paradigm, companies would use proprietary banking systems which effectively created a hardwired connection between the bank and the customer. The more relationships a company had, the more proprietary connections it had to maintain. As well as being inefficient, these relationships were often difficult to unwind because companies were effectively locked in to using the proprietary systems.
When adopting a multi-banking structure today, companies need to avoid ending up with an unwieldy structure with multiple banking systems which are not interoperable. The good news is that technology has moved on. Companies can now use SWIFT for Corporates in order to maintain a number of different bank relationships using bank agnostic technology. On the one hand SWIFT connectivity enables companies to bank in a more streamlined and cost effective way – and on the other, the nature of the technology means that companies can change relationships far more readily.
At the same time, those companies which are moving towards a multi-banking arrangement are looking to do so using the most efficient structure possible. For example, one of our multinational clients is currently considering moving from a model in which they use three regional banks and around 200 local banks for local collections. Instead, the company plans to use a group of ten to 15 banks – which should be strong enough domestically to eliminate the need for the 200 local banks.
When selecting their banks on this basis, companies will look at a number of different criteria. Capabilities are key: the company will be looking to choose a bank which offers the required payment instruments in the relevant region. The bank’s geographical coverage may be less of a concern than its strategic commitment to particular markets: for example, a company may opt to choose one bank for Western Europe and another for Eastern Europe depending on those banks’ capabilities in those locations.
The greater a company’s reliance on proprietary banking systems, the greater the challenge will be in executing this type of structure – which is why SWIFT is an important enabler. Whereas creating an interface between the bank and the corporation used to be a major challenge, requiring a great deal of programming and testing, today the exercise is relatively cheap and easy because there are more global standards and open formats available for banks and corporates to use. SWIFT is facilitating much of this, either by providing the connectivity itself or by providing the standards needed to support the new formats.
For companies looking to set up a multi banking structure, the ability to comply with SWIFT standards is likely to be a priority, as is the ability to deliver economies of scale which will lead to favourable pricing.[[[PAGE]]]
As companies’ requirements evolve, the nature of their banking relationships is also shifting. The multi-banking model requires a different type of dialogue between banks and corporates, as well as a greater degree of openness about the capabilities that banks can offer.
In a single banking model, companies might issue a regional request for proposal (RFP) and adopt a structure in which the winner takes all: the chosen bank might have very strong capabilities overall but it might also be required to cover some countries in which it is weaker. In the new world, it is more acceptable for banks to be transparent about the fact that they want certain parts of a company’s business, but not other parts. This allows banks to gain the parts of the business that they really want, while giving corporates the assurance that they are choosing the best bank for each market.
The new model also requires a different dialogue about the relationship by positioning both parties as business partners, rather than as buyer and supplier. In order to decide how much business they will allocate to their tier one and tier two banks, companies are looking to gain a greater understanding of what their business is worth to their banks. As a result, banks are becoming more transparent about the extent to which their willingness to lend may be affected by the value of their clients’ deposits.
So far, this trend is being driven by large corporations which have sufficient buying power to make a multi-banking arrangement attractive from the banks’ point of view. However, as this shift becomes more established it is likely that smaller companies will follow suit. In the current climate, companies are no longer willing to put all their eggs in one basket – and the technology is there to help companies achieve greater diversity without compromising efficiency.
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