Published: January 01, 2000
In this month’s Executive Interview, we are delighted to feature Paul Simpson, Head of Global Transaction Services at Bank of America Merrill Lynch. Paul is recognised as one of the dominant and most well-respected voices in the global transaction services industry, so it is a pleasure to be able to share his thoughts and insights. Relationships between corporates and their banks have never been more important, but they have also changed beyond recognition in recent years. No longer can a salesman turn up in a shiny suit with a briefcase of product brochures; similarly, corporates cannot simply expect that a bank will deliver a product or service just because they ask for it. In this interview, Paul Simpson describes how relationships between corporates and their banks have developed, and how these are continuing to change in the present climate.
In recent years, we have seen a significant evolution in the way that corporates and their banks work together. The combination of economic stress, constrained liquidity and market volatility, together with a changing regulatory environment, has forced corporates and banks alike to focus on what is most important to them. For example, mid-sized companies have increasingly pursued expansion plans in new markets, and need a relationship bank to support this growth, often in territories that are unfamiliar to them. Larger companies that may already have a global footprint have been focused on developing robust contingency plans.
Whatever the size of company, and whatever their particular priorities, the best relationships are those where clients act as advisers to their key banks so that the bank can prioritise investment in the solutions, services and countries which deliver the greatest value to its clients. This has been the basis of a rigorous advisory process that we have developed at Bank of America Merrill Lynch, enabling us to refine our strategy in the interests of our clients and deliver the solutions and customer experience that will enable them to achieve their goals.
This approach is quite different from the historical relationship between banks and corporates. Roughly five years ago the primary focus was on selling individual products. This commoditised approach has evolved significantly and leading banks are now focused on developing deep insights into their clients’ industry trends and priorities, and understanding their company strategy in detail, enabling them to tailor solutions very specifically to meet the clients’ individual needs.
It is undoubtedly the case that most larger companies have moved away from a global banking concept to a model that enables them to diversify their risk more effectively, without compromising their operational efficiency or visibility and control over their cash. We are therefore seeing many companies adopt a regional banking model, leveraging the core strengths of trusted banks in each region, whilst leveraging innovative technology to maintain cohesive connectivity and financial processing. This has been a major opportunity for Bank of America Merrill Lynch as companies with which we have not had a relationship in the past are recognising the strength of our capabilities in all major regions.[[[PAGE]]]
With multi-bank and integration technology enabling effective communication at a transaction level, treasurers can focus instead on working with the bank at a more strategic level. We are seeing a strong upward trend in the strategic importance and breadth of activities conducted by treasury departments globally, and proactive engagement with their trusted global strategic banks for advice can be a valuable way of facilitating treasury’s changing role. Given our firm’s deep investments in these areas through services like CashPro® and Swift Direct Access, we are well positioned to win significant market share as a strategic transaction services provider and integration advisor.
Inevitably, there are practical limitations in how far relationships between banks and corporates can evolve, particularly as a corporate cannot form an advisory relationship with every one of its banks. We are therefore seeing clients starting to bring their banks together in order to create cohesive solutions that support their need for risk diversification whilst meeting their global operational and financial objectives. In fact, we are seeing greater collaboration across the banking and corporate community now more than ever before, which is leading to significant achievements in standardisation and interoperability. Furthermore, this co-operation enables corporates and the global transaction services community to communicate concerns more clearly – for example to regulators during a time of substantial change when it is vital that global trade is not compromised.
Introducing new regulations inevitably brings challenge and change, but the effective, consistent and transparent operation of the financial services industry is imperative. It is, however, important that regulations crystallise lessons learnt from the past without destabilising an already fragile financial landscape.
As a result of the capital requirements of Basel III, banks will inevitably have to look closely at their client relationships and focus their energies on those for whom their activities deliver the greatest mutual benefit. Corporates too are becoming more selective, and are keen to develop multi-faceted relationships with banks that understand the holistic nature of their banking requirements. With the cost of capital increasing, banks and corporates alike are motivated to find innovative financing solutions that leverage the client’s assets as opposed to creating balance sheet exposures.
In addition to the cost and availability of capital, Basel III is likely to affect transaction banking relationships in two major ways. The first of these is liquidity. Operating or cash accounts are becoming more valuable than interest-bearing or investment accounts for banks, so we can expect to see new investment opportunities for corporates emerging. Secondly, trade finance is likely to be significantly impacted if current proposals are implemented. Under Basel II, trade finance instruments are weighted at 20% in the calculation of banks’ capital ratios, but in most cases under Basel III, these will be weighted at 100%. Consequently, trade finance will require a disproportionate allocation of capital, posing a significant challenge for banks and corporates alike, and potentially resulting in considerable cost increases. There are still concerted efforts by the International Chamber of Commerce, supported by the wider banking and corporate community, to overturn this proposal.
Working capital has become a huge focus for most CFOs and treasurers, and many company boards are now monitoring working capital-related metrics. Treasurers have a pivotal role to play in optimising working capital by coordinating different parts of the business such as procurement, technology, supply chain, payables and receivables. It is often the first time that companies have strived for and achieved this degree of cooperation across business functions. This allows treasurers to initiate improvements across the financial supply chain that can result in efficiencies and achievements throughout the company. In order for banks to achieve real success, they need to reposition their business to reflect the holistic approach of their clients. For example, we have established a Global Business Solutions Group comprised of experienced former corporate treasurers, shared service centre (SSC) professionals, and other specialists and experts across a range of related disciplines to share their experience and best practices with corporate clients.
Centralisation of financial processing is well-established as a highly efficient way of reducing operating costs whilst enhancing efficiency and control. We have seen the development of centralised payments processing through SSCs and payment factories over a long period, but we are now seeing a huge increase in the number of SSCs that are extending their remit to include receivables management.[[[PAGE]]]
A large proportion of mid-sized and large corporations have centralised their treasury function regionally or globally, leading to a greater emphasis on real-time reporting and visibility over cash and risk. However, while it is essential to retain visibility and liquidity of cash, and ensure a consistent approach to treasury policy compliance, the growth of companies’ activities in emerging markets is resulting in the delegation of execution responsibility to local finance teams to meet local market requirements and leverage local expertise. Technology is a significant enabler of this combination of local execution and global oversight, but in addition, companies are increasingly seeking to receive local as well as centralised support from their strategic global bank advisors.
We are witnessing a huge increase in the number of our commercial banking clients that are expanding their international presence in order to counter sluggish or negative growth in their local markets and leverage new supplier or customer opportunities overseas. These companies are proving highly resourceful and we are facilitating their success with rapid deployment of payables, receivables and cash management solutions in new markets — supported with advisory services to share our expertise on regulatory compliance and market practices in countries across the globe. Clients particularly appreciate the degree of responsiveness, flexibility and expertise that we are able to offer, not only for traditional trade routes such as US to Europe, but also emerging trade routes such as Latin America to China. For example, we are proactive in working with regulators in China and Hong Kong to take rapid advantage of new opportunities in RMB internationalisation as they materialise.
It is not too dramatic to say that the debt crisis is redefining the transaction banking landscape in Europe. Some banks have been forced to step back as they are finding it difficult to secure USD liquidity and make the necessary investment in their solutions and services. This is exacerbated by changes in corporate behaviour with a ‘flight to liquidity’ that is benefiting banks such as Bank of America Merrill Lynch. We have engaged proactively with our clients to understand their risks and execute contingencies, and continue to invest heavily in market developments such as SEPA, which we consider a major contingency for industry changes.
Inevitably, when considering the debt crisis, we hope for the best and prepare for the worst, and our clients are adopting a similar approach. Sweeping cash into a primary jurisdiction, reconciling receivables promptly, monitoring credit risk and chasing collections systematically are all among the techniques that we are helping our clients to implement or strengthen. Clients still have questions of course, such as how they could pay or receive cash quickly in a new currency, but we have devised the technology and processes to enable this overnight should it be required in the future. As with the global financial crisis of 2008-9, the current debt crisis is highlighting differences between banks, their strategies and capabilities, giving corporates the opportunity to review and refine their transaction banking relationships and strategies.
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 […]
