Going Global but Staying Local: Banking Relationships
Taking the decision to centralise all or part of the treasury function poses quite a conundrum for today’s corporate treasurers. Striking the optimum balance between retaining local banking infrastructure and drawing on the advantages of a network bank is an art as there is, simply put, no ‘one size fits all’ solution.
Centralisation of corporate workflows and structures gravitates towards the selection of a single regional banking provider. By concentrating a relationship with one network bank, the benefits are self-evident: product and services are harmonised and consistent on a regional basis; technology and international standards – particularly those employed for payments and collections – optimise and streamline processes such as reconciliation; one single relationship reduces the number of interfaces and counter-parties to manage; and concentrating business creates buying power for the corporate.
However, some sacrifices may need to be made to achieve these benefits. A strong local bank has some attractive offerings for corporates: sound knowledge of local market practices, comprehensive and customised local services, the ability to process transactions book-to-book, a commanding position in the local clearing market and a retail franchise.
To achieve a streamlined cash management structure and streamlined banking relationships, services need to be reviewed to identify those that can be centralised and those that should be handled locally. Only then can the corporate determine whether local relationships can be replaced and to what degree.
Areas that adapt well to centralisation:
Where centralisation may sometimes fall wide of the mark is with regard to certain retail services, such as notes and coins. Trade-offs are also commonplace with a centralised structure. Pricing differentials, for example, may occur in transaction processing, as pure domestic banking services tend to be less expensive from local banks. However, that alone should not be an argument to maintain those services locally, as centralising them creates significant cost savings in terms of across the board regional processing efficiencies.
Centralisation, then, does not always present an either/or solution. A global or regional bank, regardless of the depth and breadth of its network, might not be all things to all corporates and replace local banks in all areas – be it geographically or functionally. Integrating a domestic bank into the overall mix of an international or regional centralised treasury structure may become a necessity. The challenge is coordinating smoothly from the outset in order to avoid running ragged further down the line and losing any administrative efficacy gained by centralisation.
Recognizing the limitations of a multi-bank structure in advance will help clarify certain issues:
While it is possible to align a centralised structure and a local banking relationship by means of a multi-bank approach, establishing such a structure is less efficient than mandating a single bank provider. To mitigate multi-bank limitations, it is prudent to use local banks only when absolutely necessary. The converse would mean maintaining a plethora of local banking relationships and those banks sharing a limited number of services. In this scenario, the corporate may find itself in a sub-optimal position dealing with a number of disgruntled local banks.
Careful selection of the network/international cash management (ICM) bank is a must. The ultimate choice should reflect the best fit with the corporate business requirements. Here the benchmark criteria would be:
Once the ICM provider has been determined, it is key that the chosen local banking partner can communicate on account information and transaction processing in a seamless way with the ICM through the same systems and technology, such as MT940 account information and MT101 multi-bank payments etc. At this juncture, it is also necessary for corporates to consider existing and future credit requirements, as this may influence the choice of local relationships.
It is a fact that many corporates, regardless of their regional centralisation programmes, opt to retain strong local banking relationships on their home turf, where an important share of their business is conducted. The rationale here is that the business would suffer from compromising best-of-breed local services and jeopardising domestic banking relationships. The outcome is a two-tier structure with the home country programme operating alongside the centralised overseas programme. For those corporates that reside in countries served domestically by global network banks, there is no issue at stake. The challenge becomes far greater for those corporates dealing with pure domestic banks, especially in the European cash management environment. Finding a local player with the ability to provide market-leading international cash and treasury services is not possible in many countries today.
The larger multi-national corporation would typically incorporate both domestic and global providers into their banking panel. For other corporates, the problem is not so easy to redress, as many of the global network players may not have the same strategic interest in the corporate as their house bank. How then can they gain access to the cross-border products and services that have thus far been the domain of the multi-national corporations?
Market forces and regulatory changes have fuelled consolidation in the cash management market, particularly in Europe. Two distinct, yet complementary, business models are emerging: strong relationship banks serving the needs of corporates within their local operating region and global network banks serving the needs of customers on a global scale. In order to remain competitive and to fulfill the demands of a growing number of large local corporates requiring cross-border services, the regional banks are forming long-term strategic partnerships with global providers to buy-in a wide range of integrated cash management solutions. They are supported by comprehensive customer service and streamlined documentation processes.
Such partnerships create a win-win-win situation for all parties. The corporates gain access to leading pan-European cash management services through their domestic relationship bank while the relationship bank strengthens its presence in the local market with a fully fledged product range. The global provider leverages its investments into infrastructure to achieve critical mass in terms of increased transaction volumes. This is a prerequisite for operating a profitable cash management franchise in a business with a growing cost-base and imposing regulatory requirements.