Mono-bank versus Multi-bank: Where are we Now?
Why do we have so many banks? Are we getting value for money? How many banks does our organisation actually need? And how do we find them, evaluate and reward them? These are some of the questions that treasurers (and increasingly, CFOs) of multi-national corporations are asking themselves.
This article examines some of these questions in the specific context of international cash management; and in particular considers some key factors and influences on the decision multi-national corporations must make about the cash management structures and suppliers. Over the next few months gtnews plans a short series of articles around the topic, including contributions from corporations with both mono-bank and multi-bank cash management structures. It is worth clarifying at the outset that mono-bank is convenient short-hand for structures revolving around a few carefully selected major banks providing a portfolio of services; for those few multi-national corporations who have pursued it, true mono-banking (use of a single global bank) has proved an elusive goal. Multi-banking is the norm; the real question is: how many or how few banks must I use to get what I need? And this is where the article will focus.
Taking an arbitrary start point of 1994, how has the state of the art advanced in the past ten years? I would suggest that the following changes have been the most significant:
The single issue most commonly identified in discussions with corporates is credit. Any corporate that requires credit-based services from its banks (particularly those where significant capital is at risk, eg loan facilities) has been forced to recognise that those services are now viewed as unprofitable by its bankers. There are variations between regulatory regimes, but essentially for banks in OECD countries, the return on capital from lending is inadequate or negative.
The consequences of this recognition include:
In this environment the challenge in managing bank relationships is to ensure that, in general, each credit bank gets a fair share of the collateral business it requires to make the relationship profitable.
In addition, many corporations with significant debt requirements feel uncomfortable concentrating their bank relationships among too small a group of providers, arguing for the need to maintain a wide portfolio of relationships in case of need. Others feel that a smaller group of well rewarded providers offers more continuity and certainty of credit support.
Although the credit/profit/relationship equation is a significant element in the assessment for many corporations, there are other factors. Firstly, because not all corporates are significant users of bank credit, and secondly, because changes in corporate business models are forcing themselves into the bank structuring and selection equation. These factors include:
Many corporates now find themselves in the position where they have significantly re-engineered their internal processes, and are now reviewing how to carry this through into their connections with the outside world, including the international banking community. Given the slow pace of change in international banking, relative to the changes in corporate structures mentioned above, a number of corporates view changing banking structures and providers as being too hard or not worth the effort. Others have seen significant reward for their efforts in this area.
For those readers who are looking at this area, and evaluating their bank structures and providers, here is a short list of topics that will reward early scrutiny:
The policy will contain, among other things, statements of the company’s philosophy on diversification of providers and need for credit support.
With this understanding of the environment in which we are working, we can also understand the drivers that have pushed many corporations to have more banks than they need. For corporations in this position, moving aggressively to reduce the number of banks in use may be seen as both ambitious and risky; so what can we learn from those who have made the step already? In our next article we will therefore examine how some of these principles have been worked through in practice.
* On the website of the Association of Finance Professionals www.afponline.org