Published: January 01, 2012
This article is the first in a new series in TMI, ‘The Treasurer’s Voice’ in collaboration with Treasury Strategies Inc. These articles aim not only to share the views of banks, vendors and industry experts on key treasury-related topics, but also to canvass the views of our readers across the world. Each month, we will publish a short survey (which you can find on our website, www.treasury-management.com or in our weekly emails) to which we invite all treasury professionals to respond. In the following edition, we will then analyse the results with industry experts. Please click here to access the latest survey.
The first survey, conducted during November 2011, attracted over 100 responses on the topic of bank relationship management. The survey aimed to ascertain treasurers’ plans for tendering their cash management business over the coming year, the regions of focus, and their criteria for selecting or retaining a cash management bank. Our industry spokespeople this month are Michael Spiegel, Head of Cash & Trade, Deutsche Bank, and Aidene Walsh, Head of Global Transaction Services, UK & Ireland, The Royal Bank of Scotland.
The first question aimed to understand treasurers’ plans for tendering their cash management business over the next 12 months (figure 1). Of these, over half (52.4%) had no plans to tender their cash management banking business, which were more or less evenly divided between those that had recently reviewed their cash management banks (27.2%), and those that were satisfied with their existing arrangements (25.2%). However, the remaining 47.6% intended to review their cash management banks in the coming year, the majority of which intended to do so either for their global business or for one or more regions.
The fact that a company intends to review its cash management banking globally does not imply, however, that it will appoint a single bank across all regions. As Michael Spiegel, Deutsche Bank explains,
“Our experience over the past 12-18 months is that few companies tender their cash management business with the expectation that they will make a single appointment, except for the smallest companies. In the current environment, it is no surprise that treasurers prefer to balance their risk and relationships. Consequently, the approach tends to be regional: for example, we have seen a number of tenders recently for Europe, Middle East/North Africa, and Latin America. In some cases, it also makes sense to tender cash management banking in individual countries where the volume or complexity is particularly high, in order to leverage best-in-class local services and further diversify risk.”
Aidene Walsh, RBS concurs,
“With the exception of small and medium-sized enterprises (SMEs), most international corporations are inclined to appoint regional banking partners, often with the addition of a global overlay structure. A major factor that influences companies’ choice of regional banks is the overall credit relationship, as treasurers will seek to establish reciprocal relationships with their credit banks and award them mandates for ancillary business such as cash management.”
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She continues,
“In contrast, SMEs tend to prefer working with a single bank as they are typically more sensitive to pricing issues. Therefore, there may be more opportunity to negotiate if a company awards its entire cash management business to a single bank. There are other advantages too. Working with a single partner is more convenient and therefore less resource- and technology-intensive than working with multiple banks; in addition, the bank can fulfil the role of trusted adviser in addition to transaction bank, which can be immensely valuable.”
Amongst those that indicated that they would be tendering their cash management business in the near future, Europe was the most popular region mentioned, although every region was mentioned by one or more respondent; similarly, the UK and Brazil were the most common individual countries referenced, although many others across Asia and Africa in particular were listed.
“Treasurers and CFOs are dealing with a wide range of challenges given the economic climate, not least the Eurozone crisis, so few companies may have the bandwidth both to deal with these issues and to tender their cash management business, unless there is a compelling business reason for doing so.”Despite the expressed intention of a large proportion of respondents to tender their cash management banking business, Aidene Walsh, RBS, warns that treasurers should not enter into a bank tender process lightly,
Michael Spiegel, Deutsche Bank, continues,
“Although many treasurers may be contemplating tendering their cash management business, not all will do so. The resources required to undertake a project of this kind are huge, particularly when tendering in more than one region. As a result, the trend is typically that companies tender one region at a time.”
Respondents were asked what factor(s) were driving their decision to tender their cash management banking business (more than one could be indicated). 37.3% of respondents indicated that they intended to align their cash management business with their credit providers, such as including those who had expanded their financing panel, and reducing their cash management business with banks that no longer provided financing. As Aidene Walsh, RBS indicates later in this article, this trend is likely to continue strengthening in the future.[[[PAGE]]]
Eighty per cent indicated that the process was being conducted as part of a broader treasury re-engineering project, with a focus on rationalising bank providers. With the increased corporate focus on improving visibility and control over cash and risk, and enhancing financial processes, this is not a surprising statistic, illustrating the growing focus on an efficient, streamlined treasury organisation to protect the financial interests of the business.
Michael Spiegel, Deutsche Bank illustrates the factors that the bank sees driving change,
“The liquidity crisis has prompted many treasurers to seek greater control and visibility over their cash. Whether physical or notional, treasurers are looking to centralise their cash, which is easier with fewer cash management banks. There are other facets too to the trend towards rationalisation, such as managing risk more effectively and streamlining connectivity.”
Pricing was indicated as an issue by 26.7% of respondents, but typically, this was not the sole reason for considering change. Michael Spiegel, Deutsche Bank comments,
“While price is one factor in determining a company’s choice of banks, external bank charges alone do not drive savings: consolidating and re-engineering processes, bringing greater efficiencies, can deliver far greater results.”
Aidene Walsh, RBS, expresses surprise at the relatively high priority of pricing, even though price was the third priority given,
“In some regions where corporations are in an earlier stage in their business development, and amongst SMEs, pricing may be more of an issue than for larger or more sophisticated organisations. Even so, in our experience, while pricing is important, there are other priorities too for all companies, no matter their size. For example, service reliability, technology, the ability to provide an evolving range of products and services, and manage new regional requirements are all key factors in a company’s decision to work with a bank. An increasingly important issue is the ability for a bank to provide guidance and thought leadership, particularly during difficult economic times.”
While the trend amongst corporate treasurers is to establish a global liquidity strategy, working with a panel of banks per region or major country, more than half (51%) of payments and collections mandates are assigned to bank(s) per country. Although SEPA has the potential to simplify payment and collection methods in the Eurozone, the same is not the case in other parts of the world, where disparate payment and collection methods remain. This would appear to be changing, however, not least due to the development of standard formats such as ISO 20022, increasing use of automated payment methods in economies where cash or paper payment instruments have predominated, and expanding capabilities delivered by the global banks. Consequently, a growing proportion of companies is in a position to appoint payment and/or collection banks at a global or regional level. Even so, Aidene Walsh, RBS emphasises that the proportion of companies that appoint their payments business at a local level would seem surprising,
“It depends on the sector and size of a company, and the countries where it operates; the past 10-15 years have witnessed a gradual shift towards regional appointments, particularly for payments, and regionalising collections is also on the increase. However, the proportion of collections mandates that are assigned globally is quite high given the diversity of country-specific collection methods. This could reflect the nature of the companies in this survey.”
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As Michael Spiegel, Deutsche Bank says,
“The ability for more corporates to assign service mandates for payments and collections at a regional or even global level will depend in part on how global banks continue to develop their ability to support local instruments, although in SEPA, there is more opportunity to rationalise providers. There will continue to be reasons to maintain local payment and collection providers, however, not least to reward banks that provide credit, whether locally or globally. By centralising and optimising processes, and leveraging standard technology such as SWIFTNet, companies can gain a comparable level of efficiency working with multiple payment and collection banks to what they could working with one.”
As Michael illustrates, just because a company chooses to appoint multiple payment and/or collection banks, this does not suggest that business processes are fragmented or inefficient. Payment factories are already well-established, either as part of a shared service centre or as a standalone function within or alongside treasury, and collection factories are also becoming more prevalent. As Michael Spiegel, Deutsche Bank adds,
“As innovation in payments and collections continues, we are seeing more companies leveraging the payments/collections ‘on behalf of’ model which is a highly convenient way to enable a central entity to make payments and receiving collections for the region or group as a whole.”
The most significant factor that would influence a treasurer to change banks is a change to credit relationships i.e., a bank may start or stop providing credit, products. Aidene Walsh, RBS explains why this is the case,
“While a treasurer may be very satisfied with their existing bank relationship(s), they may be mandated to appoint one or more alternative banks according to the company’s credit panel. Although more than 50% of respondents in this survey indicated that a change in credit provider drove the decision to change banks, this figure could increase even further over the next few years.”
Service quality and technology are also popular reasons cited by respondents. For Aidene Walsh, RBS, service quality is of particular importance,
“Companies that are price-sensitive can find that shifting banks on the basis of cost results in a drop in service standards, which may ultimately result in the decision to change banks being reversed. This can be particularly relevant to SMEs. Some factors, such as technology and products, are largely comparable across banks, but the quality of service is often a significant differentiator.”
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However, while these are important factors in a corporate - bank relationship, the decision to change banks is a very considerable one. Michael Speigel, Deutsche Bank advises,
“Effective banking relationships are built on mutual trust, and switching banks means that this process has to start again. Some banks, such as Deutsche Bank, are evolving their delivery and relationship model to ensure a more co-ordinated approach to customer relationships, the result of which is higher customer satisfaction and lower attrition, which in turn allows greater trust to develop.”
With over 27% of respondents indicating that they had tendered their cash management banking business recently, it is interesting that the majority of these did not ultimately choose to change banks. There are a variety of reasons for this, but it is interesting that in many cases (more than 72%) treasurers found that their existing bank(s) met their current and future needs. An important response was that over 33% indicated that the cost of change outweighed the potential benefits. Michael Spiegel, Deutsche Bank concurs,
“It is very important to consider the cost of change in the decision to switch banks, which can be very significant. Typically, functional issues alone, such as support for a particular payment method, is unlikely to be a sufficiently compelling reason to change, unless the incumbent bank cannot support the company’s technology and integration requirements. Instead, the decision to change is typically a more strategic one, such as a change in credit relationships.”
Aidene Walsh, RBS, shares his view,
“There needs to be a compelling reason to change banks, and treasuries often lack the resources to do this compared with other priorities, particularly where a company’s technology environment is closely integrated with that of the bank.”
It is an important part of every treasurer’s due diligence to ensure that they are receiving best-in-class, cost-effective cash management services, and benchmarking banking providers periodically is a very useful way of achieving this. However, this does not necessarily mean that a company needs to launch a tender process, notes Aidene Walsh, RBS,
“It is important to review banking relationships regularly to assess the relationship, service delivery, and how both parties’ business has evolved since the last review. For example, there may be new products and services that now better support the company’s requirements, and this should be part of an ongoing dialogue with the bank.”
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Embarking on a formal tender process is a major undertaking, and should only be undertaken if there is a compelling reason for doing so, however, such as banks either offering or withdrawing credit, a substantial change to the business, or a change in the incumbent bank’s strategy or capability. It is also important to ensure that the right banks are included in the tender process. As Michael Speigel, Deutsche Bank outlines,
“In reality, there are only a few banks that have comparable capabilities across all regions. It can be extremely time-consuming to go through a tender process, particularly if you include banks that do not have the capabilities and/or regional coverage that you require. It is preferable to include a smaller number of banks, but to have a more in-depth conversation.”
Aidene Walsh, RBS, concludes by emphasising that bearing in mind the scale of the task to change banks, it should be used as an opportunity to optimise the company’s cash management activities,
“Despite the degree of change, both within corporations and in the wider economy, the approach is often to request the same solutions from a new bank as the incumbent bank. It is better, however, to focus on addressing the relevant business challenges, as any bank in the tender process may be able to offer alternative or more effective solutions. Consequently, a change in banking partner is an opportunity to reshape and re-engineer the cash management business.”
In the next edition of TMI, we feature a case study with Merck, who discuss the way in which they tendered their cash management banking business, and what they have achieved as a result.
In addition, the current survey is on the topic of treasury centralisation. Please go to www.treasury-management.com to participate or refer to our regular emails.
We would like to thank Treasury Strategies Inc. for their contribution to the survey questions this month and look forward to including their thoughts and opinions in subsequent articles.
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