Preparing Treasury for the Future: Picking the Right Bank Relationships

While my office door is always open to banks wanting to have a conversation about how they can support YFAI’s treasury operations, I believe bank relationships are changing. Yes, treasurers are searching for great products at reasonable prices, but they are also looking for strategic partners who will bring true innovation to the table. So, how can treasury go about finding the right banking partners to accompany them on their growth journey.

Before I wax lyrical about bank relationships, a little bit of background about YFAI and our treasury structure. YFAI is the global leader in designing, developing and producing automotive interiors. Most people are, often unknowingly, familiar with our technology and products. The company was formed through a joint venture in 2015 between Yanfeng, one of the largest automotive interior suppliers in China, and Adient, the global leader in automotive seating, formerly a part of Johnson Controls.

Once the joint venture was under way, we were tasked with building a treasury function for this newly combined business. On the international side, this was essentially a replication  of Johnson Controls’ treasury in terms of infrastructure and functionality. But from that initial set-up, we have made strategic changes and tweaks to create a more efficient treasury function that is complementing the new global business model and footprint.

Today, we have treasury teams in China, the US and in Germany. We also have a treasury expert on the ground in South Africa to guide certain processes and approvals since it is a currency-controlled country, which can throw up challenges at times. In addition, we have a treasury professional stationed in our automotive business centre in Bratislava – where we process the majority of our payments and receipts and carry out part of the accounting function – who is tasked with monitoring our currency exposures. Finally, we also have a treasury team in Shanghai, which predominantly looks after the Chinese domestic market and a number of countries in the Asia Pacific area.

Banking on a bright future

In terms of our bank relationships, it is important to make a clear distinction between China and the rest of the world. The culture and practice is somewhat different in China and treasurers tend to have more bank relationships than might be strictly necessary to operate the business. This is part and parcel of the local way of business, and I do not see that changing dramatically in the near future.

In the international space, we work with around 10 banks and use a notional pool for the majority of our flows, supported by local banks that have access to local clearing systems. This structure serves its purpose very well because we have been able to keep it fairly streamlined from the start – unlike some other corporates which have recently undergone bank rationalisation exercises for a variety of reasons (see box 1).

YFAI’s treasury team chose our 10 banks for their capabilities beyond pricing, products and geographical coverage. After all, banking is highly commoditised, and those factors are really a given. Instead, what we look for is a bank that offers all the fundamentals and also fits our business model well, understands our strategy and how we intend to execute it.

In other words, there has to be a strategic side to the relationship too – not just a transactional angle. Of course, we expect excellent products for reasonable prices, but we want our banking partners to offer more – to distinguish themselves from the pack through strategic advisory services tailored to YFAI’s specific needs. In my view, a banking relationship is more than a ‘supplier’ relationship. A successful bank relationship is a ‘partnership’.

Moving with the times

In addition, we are keen to work with banks that are truly innovating – and I don’t mean those institutions which simply put new wrappers on old products! We live in vibrant and exciting times. As such, we expect our banking partners to offer a variety of new products and services that capitalise on emerging technologies – whether that be through their own innovation labs, collaborations with fintechs, or industry initiatives and consortia.

Blockchain is a good example of where we expect our banks to be innovating. It holds huge potential for treasury – from improving Know Your Customer (KYC) processes, to speeding up the trade cycle. As an example, HSBC and ING recently announced that they had undertaken the first commercial trade finance transaction using blockchain with Cargill, for a shipment of soy beans from Argentina to Malaysia. This project saw the transaction time shortened by more than 40%, while costs were reduced by more than 30%.

This is precisely the kind of innovation YFAI is looking for. Why? Because in order for us as a company to stay relevant to the market, and to be at the cutting edge of our industry, our banking partners have to be nimble. And they have to bring us relevant new technology products and solutions that will help us to prepare for the future.

Know your bank

As such, I believe it is important for treasurers to start having deeper conversations with their banking partners, and to conduct a Know Your Bank (KYB) exercise. How far you take the KYB process will naturally depend on how much business you have with each bank. But regardless of size of wallet share, one of the key questions to ask is: are they able to help you advance towards your goals for treasury – and the company’s ambitions in general?

From a risk perspective, it’s also vital to understand whether your bank is already over exposed to your industry. Could this put you at risk? When working with smaller local banks, understanding the bank’s funding position is also key. If you are overly dependent on a bank and it suddenly gets into trouble, there will not only be serious consequences for your liquidity, but treasury will also need to explain this choice of banking partner to the board as this could be a material risk to your business.

Another, increasingly important, factor to include in the KYB process is the bank’s cybersecurity capabilities. It may be that some smaller regional banks do not necessarily have the budget to invest as much in cyber-protection as the global banks do. And with global cybercrime damage estimated to reach US$6tr. annually by 2021, this angle is worth serious investigation.

Picking your partner

But finding the right bank relationship(s) is not just about looking at your bank; it’s important to look at yourself, too. So, before embarking on a review of bank relationships (see box 2) or considering adding a new banking partner to your panel, I would recommend making an inventory of your entire existing set-up – from products used locally and globally to systems and platforms. This will give you a comprehensive overview of your current banking landscape.

It can also be useful to identify bank-related costs and categorise them – e.g. payroll handling, custody services, guarantee issuance, pensions, insurance, and so on – in order to better understand where efficiencies could be found. This can be a cumbersome exercise, but it will pay dividends in the long run.

What’s also important, to be armed with, is a true understanding of treasury’s needs, per market, per currency and per financial instrument. This should cover everything from simple payment transactions to foreign exchange, trade finance, access to debt and capital markets, supply chain finance, factoring, export finance, advisory services and so on. The ‘must-haves’ should be separated from the ‘nice-to-haves’ but remember that current needs and future needs should be addressed together where possible.

Being clear about your expectations of your banking partner can also help significantly in the selection process. Likewise, being open with your bank about the amount of business you can give to them should lead to more meaningful conversations and assist in the decision-making process.

In fact, open dialogue is arguably the most powerful tool in the treasurer’s armoury when it comes to bank relationship management – whether the conversation is with a new bank, or an existing banking partner.

The right fit

Being candid with your banking partners can also enable you to press ‘reset’ on existing bank relationships when necessary. Sometimes, what should work on paper does not work in practice – but with the right dialogue it should be possible to start over with your banking partner.

Of course, not all relationships are meant to be and sometimes treasurers will move banks or may look to shift some of their business to a third party such as a fintech, if the value proposition is compelling. Take Bitbond as an example: this is a global lending platform for small business loans that leverages blockchain technology to connect creditworthy borrowers with individual and institutional investors.

It is a simple and efficient platform that provides visibility to SMEs over their funding. And, in my view, it is only a matter of time before larger corporates will be able to take advantage of this type of funding. This is another reason why banks need to continue to innovate, and to engage in open dialogue with their corporate clients around their future expectations and limitations.

Making life easier

Whether treasury chooses to go down the traditional banking partner route, or branches out to work with third parties, an important ingredient in successful external relationships is avoiding systems’ complexity. 

Modern systems have been designed to be extremely flexible so that they can fit into the daily operations of a company. Usually they are also highly customisable. But the more you customise, the more complexity you introduce. And with complexity comes the need for expensive external consultants.

Often, it is actually possible to re-engineer your internal processes to suit your needs instead of customising the software to achieve the desired goals. So, I would caution against getting carried away by the possibilities of today’s software solutions and instead follow the ‘less is more’ mantra.

Finally, having a simple systems set-up also makes it easier to plug new banking partners in, or remove old banking partners, as appropriate. This means that the treasurer is not reliant on consultant or IT experts and can remain firmly in the driving seat at all times, which is ultimately where they need to be in order to make a success of bank relationships. Remember: it is not the bank that runs the relationship; it is you – the treasurer.