BankingCorporate to Bank RelationshipsMono-bank versus Multi-bank: Where are we Now?

Mono-bank versus Multi-bank: Where are we Now?

Introduction

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.

Progress to Date

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:

  • On the European front, EMU has arrived, and is now embedded in our thinking, even if not always in our practice (as the banks, for instance, still struggle with making the single European payment area a reality);
  • Globally, a handful of major banks have consolidated their offerings into a powerful (but by no means irresistible) value proposition;
  • Those same players have also, in effect, declared that the days of organic (branch or subsidiary) expansion into new territories are nearly over. Future expansion will in most cases focus on partnership arrangements or mergers/takeovers (which for the most part will not be driven by corporate cash management needs);
  • The focus of international bank payment and collection offerings has expanded to include not only foreign transactions but also local to local transactions, previously the undisputed preserve of indigenous banks;
  • Technology has moved from being an unfortunate necessity (in order to reduce bank costs), to being a key determinant of the efficiency and service levels available to corporate customers.
  • Customer expectations of service quality from their banks have increased significantly, while pricing/cost pressures have been maintained.

What Issues do we Face Today?

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:

  • The availability of credit to corporates is significantly reduced;
  • Credit is not available to corporates on a standalone basis;
  • Banks will only offer credit to customers where the overall relationship is a profitable one (for a discussion of the legalities of tying credit to collateral services in the USA, see Corporate Access to Credit*);
  • Banks will exit relationships not deemed sufficiently profitable;
  • Opening up new relationships with major banks, other than for very large corporates, is increasingly difficult. For certain types of corporates, or those in specific industries, it may be nearly impossible.

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:

  1. The drive for efficiency and value for money has underpinned a general acceptance of centralisation of support (i.e. not customer-facing) functions in many corporations. Many finance functions and treasuries have adopted this approach and now view local or in country treasury as unaffordable. This has had the combined effect of lessening traditional ties between local branches or subsidiaries and local banks, as well as putting a premium on efficient provision of services to the central location;
  2. Management of commercial cash transactions requires that the needs of the treasury for optimising relationships and credit availability must be mitigated by the need to maximise support for specific local business requirements;
  3. The new structures and infrastructures emerging from the trends mentioned above (e.g. financial shared service centres) require banking services to be sold and delivered in different ways, with more emphasis on technology and customer service than has previously been the case;
  4. An ever-stronger emphasis on cost management means that banks collectively are under huge pressure to move from hidden charging (spreads, deductions and value dating) to visible, explicit charging agreed in advance with the customer. It is worth noting that, in the EU, these pressures are independent from, but additional to, the legislative pressures emanating from the European Commission.

How Should we Respond to these Drivers?

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:

  • For those who have inherited a multi-bank structure from operating companies, or where operating companies still control banking relationships, examine and define the real business benefit behind each of today’s relationships. Any relationship without a persuasive business or financial rationale can be regarded as potentially surplus to requirements;
  • Establish at the centre (i.e. at group level or regional level depending on your corporate structure) a policy and a strategy for managing:
    • Bank relationships in general;
    • Cash management in particular.

The policy will contain, among other things, statements of the company’s philosophy on diversification of providers and need for credit support.

  • Based on that central strategy, decide whether the mono-bank or multi-bank model is appropriate for your circumstances (remembering that many corporates have in fact adopted a hybrid model);
  • Evaluate each of your providers in terms of their contribution to your preferred model;
  • Identify any gaps that may need to be filled by opening relationships with new providers.

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

Comments are closed.

Subscribe to get your daily business insights

Whitepapers & Resources

2021 Transaction Banking Services Survey
Banking

2021 Transaction Banking Services Survey

2y
CGI Transaction Banking Survey 2020

CGI Transaction Banking Survey 2020

4y
TIS Sanction Screening Survey Report
Payments

TIS Sanction Screening Survey Report

5y
Enhancing your strategic position: Digitalization in Treasury
Payments

Enhancing your strategic position: Digitalization in Treasury

5y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

5y