Cash & Liquidity ManagementCash ManagementNetting/PoolingA New Landscape After the Euro Pooling Hype

A New Landscape After the Euro Pooling Hype

Most successful corporates experience consistent growth in turnover and geographical coverage. The creation of the single European market facilitates companies to cross borders and expand their businesses into new markets. As a result, their payment flows are more international than ever before.

To be able to meet their customers’ needs, banks have followed their businesses abroad, either via their own branch networks or via networks of correspondent banking relationships.

But the existing banking partner may not itself be able to offer all the services needed. Correspondent banking set-ups are in most cases not in alignment with the strategy of the corporate client, i.e. streamlined and harmonised processes. The routing of cross-border payments using correspondent banks is often expensive and time-consuming, something that rarely satisfies the customer.

During the last years of the 20 th century, banks and corporates started to prepare for Euroland. Most banks thought that if they could not offer an extensive Euro cash pooling solution, their clients would move to banks that could. Many corporates felt that, even though the undisputable benefits of Euro cash pooling were yet to be presented, it was better to jump on the train than remain on the platform. A period of hype was born during which banks, event companies, financial magazines etc. all spent a lot of resources establishing themselves as important players in the new Europe. Euro cash pooling is good in many cases, but it is not heaven.

The lessons from the Euro cash pooling hype have been hard on many corporates. Euroland is not one country, and not even the large banks are completely ready. Therefore, the focus today is ‘back to basics’, i.e. make it work! Nobody says that cash management has become simpler, quite the contrary. But the corporates demand simple solutions to complex problems.

A corporate wants to be able to execute payments quickly, at the lowest cost and without errors. Feedback or reporting from the bank has to be as complete as possible to ensure automatic reconciliation. Liquidity must be concentrated as far as possible (but maybe sometimes the work involved in getting it all to one place is too high). There are a number of ‘must haves’ regardless of the banking set up the corporate uses:

Good geographical coverage – The corporates’ focus on its core business and harmonisation demands a solution that covers as much of the business as possible.

Cross-border cash pooling – Cash pooling mean’s concentrating the cash – not only locally in every country, but also across borders with a minimal number of ‘hiccups’.

Single point of contact – This is required for all types of customer support. Not all corporates want this (and especially not all their subsidiaries) but the bank must be able to offer it – it is a ‘hygiene’ factor.

Harmonised pricing – Harmonised pricing is often requested on cross-border services. Corporates have different requirements, but this option must be offered. The level at which the corporate measures the subsidiaries (before or after financial net), determines the requirement in this area.

Straight-through processing (STP) – Corporates are becoming more and more sophisticated internally. Focusing on core business, constant downsizing of administrational functions and a low interest rate level demands that the processing of payments and information is smooth and cheap.

All accounts in a single electronic banking system – There are enough systems already. Why accept a solution that requires more than one system? However, there is still an acceptance of the fact that a local electronic banking system might be needed to manage local transactions in certain countries.

Co-ordinated implementation of solution – The biggest risk in cash management is the implementation. A bad implementation is like a tattoo; it will always be with you. The corporate demands that the selected solution is implemented in a controlled, qualitative way.

A formal joint customer team – A team of this kind is necessary to organise staff from all the banks involved, including relationship managers, cash management consultants, implementation managers, customer support staff etc. Understandably, corporates dislike it when the cash management provider does not have all its ‘tentacles’ in order.

Joint product development – If more than one bank is involved, a harmonised solution requires that the partner banks are striving for the same cash management vision. Otherwise it will seldom bring the desired benefits.

Long-term interest – Cash management is long term; it involving heavy investment, long sales cycles and implementation periods, and long-term agreements. A cash management mandate must be based on long-term commitment by all parties involved.

In short, the corporates are seeking new efficient solutions to support their business. They face three alternatives: one-bank set ups, bank clubs and partner-bank solutions.

Due to the recent economic downturn and the general focus on core business and strategic clients, many global banks have started to narrow their focus. Not all companies can expect to be welcomed as valued customers any more and many existing customers have to accept that they will no longer get the attention from banks that they got three to five years ago in terms of service or credit. Customer target lists have been reduced significantly; only well known multinationals can feel relatively secure. This frustrates many medium-sized and large companies. Finding a cash management provider that serves their pan-European needs is once again on the agenda for many.

Bank clubs are available to most corporates. The rationale is to join forces to offer the market a better geographical coverage. The idea is good, on paper, but will typically only solve some of the challenges the corporates face trying to establish a good cash management solution for a whole region. There are too many parties involved and the banks come from too many different legal jurisdictions to reach a satisfactory level of harmonisation. Joint development, support and overall pricing etc. is practically impossible. Also, do all involved banks have a true long-term interest in the specific corporate?

The evolvement of the a new kind of Partner-bank solution has arisen from the above-mentioned limitations. The aim is to find a partner with a common view on cash management and to integrate processes tight enough to be seen as a serious alternative to one-bank solutions. The challenges lie in legal harmonisation and speaking with one voice, but the strengths are substantial. The corporate client gets good geographical coverage and limits the risks inherent in relying on only one cash management provider. And, in some cases, the corporate has the opportunity of securing the banks’ long-term commitment to cash management and the client, by requesting a funding commitment before entering the solution.

Nevertheless, synergies and harmonisation must be real, not just slide presentations. Meeting the aforementioned requirements takes a lot of commitment from both partner-banks; few partnerships between banks have historically been more than just mutual agreements to mention each other’s names in presentations or proposals.

But things are changing! There are already a limited number of partner-bank solutions available in the European market that are beginning to prove very competitive alternatives to one-bank set-ups. A number of leading banks in cash management, regional as well as multi-continental, have come to the conclusion that a serious partnership between two banks offer the best solution for the majority of mid-sized to large corporates. The key ingredients are cross-border pooling ability combined with true local capabilities. To ensure quality, service level agreements (SLAs) are established between the banks. Corporates can thereby require an SLA bilaterally between and themselves and the banks to ‘legally secure’ quality of service and long-term commitment.

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