BankingCorporate to Bank RelationshipsThe Continuing Need For Partnership

The Continuing Need For Partnership

The partnership between a corporate treasurer and her banks – or a banker and her client treasurers – remains the most critical defining element of successful bank/corporate relationships. This remains true despite periodic trends that shift the balance in favor of either the treasurer or the banker. Current trends are no exception. Treasurers are becoming more strategic, taking on more and broader responsibilities than ever, and doing so with fewer staff. On the credit side, it is currently a buyers market with bank appetites for loans exceeding the current corporate demand. Banks continue to consolidate and specialize, resulting in the provision of banking services that is far less fragmented. While not oligopolies, some banks have established themselves as dominant scale providers of critical services (e.g., JPMorgan Chase with ACH and global clearings). While the first trend clearly argues for partnership, the latter two, when viewed in isolation, appear to favor corporations and banks, respectively. This article explores these three trends in more depth, their impact on the banking/corporate relationship and the continuing need for partnership.

The Expanding and Increasingly Strategic Role of the Treasurer

There is little doubt that treasurers are taking on more and doing so with stable or leaner staffs. Their job is no longer solely a matter of guarding resources, securing outside sources of liquidity and/or making sure that non-credit services are evenly and fairly distributed among credit relationship banks. Now treasurers are increasingly responsible for broader sets of duties that make them more integral to the running of the business, including working capital management and enterprise risk management activities. According to the Treasury Strategies 2005 US Corporate Treasury Research Program, 61 per cent of treasurers say they are taking the lead in working capital decision-making with 35 per cent assuming responsibility for working capital metrics. More than a third of the respondents have established integrated risk management groups. In addition to working capital management and enterprise risk management, international treasury activities that in the past have been performed locally or regionally, are increasingly being centralized.

European treasurers’ roles are not yet defined as broadly. Working capital responsibilities and activities are spread across more departments, with less treasury influence, creating more challenges in developing a cohesive working capital strategy. However, both US and European treasurers are faced with similar strategic issues and with leaner staff. Common issues identified include risk management, regulatory issues as well as technology and systems. Technology and systems have been a key treasury issue for several years as treasuries seek greater automation and controls, both to meet regulatory needs and to free up attention for more strategic issues.

As treasurers take on ever-greater responsibilities and adopt a more strategic perspective, the challenge for the banks, if they want to be successful, will be to provide more value to the treasurer. They must take the time to develop an in-depth understanding of the needs of the treasurer and respond with solutions that meet those needs. They can no longer sell services in silos. With a greater focus on working capital, treasurers need solutions. For example, they don’t just need a lockbox. They need a collection solution that incorporates multiple and converging payment streams – paper, electronic, plastic – and they need information about these various payment streams integrated into their back offices.

There may be some treasury services that are purely commodities; that lend themselves to competitive bidding situations and placement with the lowest bidder, irrespective of whether that bidder is a credit/relationship bank. However, when viewed from a strategic perspective, most treasury services placed with banks are an integral part of a broader solution. Successful banks will provide more of, or all of the solution. The strategic treasurer will view far fewer services as commodities to be placed with the lowest bidder.

As the treasurer’s role becomes increasingly strategic and broader in scope, the successful banking/corporate relationship will continue to be a well-developed partnership. Banks must broaden their participation in the relationship to meet the broader needs of the treasurer. The only services that will be viewed as purely commodities will be any services that are not strategic to treasury or the business.

Credit Buyer’s Market

In the current environment, there are more banks with an appetite for loan assets on their books than there is demand for loans. Corporate liquidity levels are at an all time high (see table one below)

Table one: Total Corporate Liquidity 1999-2005,($ Trillions)

 

Over the last 12 to 18 months, companies have negotiated very attractive credit arrangements including longer terms (up from three years) and more attractive covenants. With so much liquidity and attractive credit arrangements in place, corporations arguably have less need for banks in this environment, or less of a need to place non-credit business with credit banks. They could become more price/commodity shoppers. However, strategic treasurers recognize the long-term nature of bank relationship management and the inevitability of business and credit cycles. They cannot manage their banking relationships in terms of current needs. And despite the fact that it is a buyer’s market, banks are still expecting, and getting, non-credit services when they extend credit (see table two below).

Panel two

Table two: Cash Management Services Spending for Credit Providers

 

The fact that it is currently a buyers market should not have any significant impact on banking relationships with corporations, as corporations recognize the strategic importance of the long-term relationship, and even more so as treasurers take on more strategic roles and perspectives. Partnerships with their banks are as important as ever, if not more so.

However, one aspect of the current credit environment is that companies, having focused on renegotiating very attractive credit arrangements in 2004, are now focused on redistributing operating services across their banks. Many treasurers expect their cash management service usage to increase, however, few expect their number of banks to increase. This bodes well for the current relationship banks (see figures one and two below)

Figures one and two: Current Relationship Banks

 

Changes in the Banking Environment

The US banking industry in the US has gone through multiple phases of consolidation over the past two decades with the result that a few large financial institutions (JPMorgan, Bank of America and Citigroup) now dominate the market for both credit and cash management services. These banks have also become dominant providers of global services. Wachovia, Wells Fargo, Mellon and ABN AMRO play a larger role in the middle market and mid-corporate segments (see table five below)

Table five: Credit Providers and Cash Management Providers

Rank Credit Providers Companies Using %
1 Bank of America 48
2 JPMorgan 47
3 Citigroup 27
4 Wachovia 20
5 ABN AMRO 13
Rank Cash Management Service Providers Companies Using %
1 Bank of America 58
2 JPMorgan 44
3 Citigroup 22
4 Wachovia 21
5 Wells Fargo 17

At the same time as these banks have gained dominance in the US cash management market, some have also become scale service providers in key service areas (e.g., ACH and global clearings services for JPMorgan Chase and depository services for Bank of America) that gives them competitive advantages both in terms of price and service features/levels. The cost/pricing advantage comes as a result of very disciplined approaches to running the businesses (as well as a substantial geographic footprint in the case of Bank of America).

Bank consolidation in the US and the specialization noted above, has limited the number of service providers; and for those companies with service requirements in an area dominated by one or a very few providers, competition is limited even further. While an environment with fewer and more specialized banks appears to create a seller’s market, there are two factors that offset the imbalance and necessitate partnership for the optimal relationship from both bank and corporate perspectives. The first is that while there are fewer banks and certain banks have become scale providers, they are not oligopolies. There are alternatives for companies, even if they are more expensive. The second is that the services offered by banks (whether at scale or not) are each part of a broader solution/set of needs. Both parties must work closely with each other to address the broader needs.

European Banking Relationships

The current situation in Europe is very different. While there are banks with dominant market penetrations in their own countries or region (e.g., UBS with 76 per cent in Switzerland or Nordea with 68 per cent in the Nordic region), no single transaction service provider has established a dominant pan-European position. The 2005 European research shows only Deutsche Bank with greater than 10 per cent penetration of the European market.

When asked about their top treasury issues, the research participants identified dissatisfaction with pan-European banking services/capabilities both directly and indirectly. Liquidity management was the top treasury issue reported in 2005 with concerns about global cash management (including centralized access to information and managing cash across banks and countries) mentioned as one of their major worrys with liquidity management. Dissatisfaction with their current bank partners was also listed as one of their top five treasury issues. Dissatisfaction centered around lack of adequate treasury service offerings (especially across Europe), outdated systems or services, difficulty in accessing bank information, and communication issues both among and between banks and their clients.

As the trend towards bank consolidation in Europe progresses, corporations will begin to see the provision of enhanced pan-European services. Both banks and corporations will need to work in partnership to ensure the successful introduction of and usage of pan-European services/solutions.

As the treasurer’s role broadens and becomes more strategic, it also becomes more complicated. The treasurer needs assistance from banks to minimize the complication and facilitate the ability to focus on the most critical and strategic issues. The treasurer also needs to ensure that the company’s banks are committed for the long term, available when needed as a source of credit and as an ongoing provider of strategic services/solutions for the business. While banks are consolidating and, in some cases specializing, they cannot afford to operate in a vacuum. They must continue to stay in touch with the needs of their corporate customers, which means offering solutions versus individual services and also expanding their offering to meet the broadening needs of the treasurer. Without a partnership approach neither party can achieve success.

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