The banking landscape across Europe is evolving as banks re-position themselves to meet the more sophisticated demands of their corporate clients as well as cope with changing market trends. The Single Euro Payments Area (SEPA) and industry developments, such as corporate connectivity with SWIFT and the standardisation of payments data with the demise of bank specific standards, are all driving change for banks and corporates.
The introduction of SEPA is the biggest transformation of the payments business that the financial services industry has experienced to date and it is a huge undertaking for European banks. In order to comply with requirements for SEPA, and prepare for the payment instruments it will introduce, banks must invest in new infrastructure and technology. The pressure on cross-border transaction fees will continue as cross-border and domestic fees will all eventually be priced at the same rates. What strategies can banks employ to overcome these substantial pressures and meet the needs of their corporate clients?
Rise of Partner Banking
Due to market developments, such as SEPA and the changing needs of corporate clients, it will become more difficult for network banks to offer the right local services to their clients for an appropriate fee. The proprietary networks and the high maintenance fees to interconnect branches and systems are costly for network banks. As a result, many global network banks are increasingly turning towards the concept of partner banking.
Instead of maintaining and operating branch offices in all countries, partner banks (as the title suggests) form partnerships with local banks in the countries they want to operate in and use their partner’s branch offices to serve clients. The partner banks have access to more branches in the countries they want to operate in (without making any infrastructure investment) and can offer corporate clients better quality services because of the domestic competency of the local banks involved.
The advantages of network banking, such as standard connectivity to services and a uniform product offering across countries, cannot be ignored though. Each partner bank will have its own strategy and product functionality so it is harder to offer clients one standardized format for products and services. In addition, not all partner banks will offer the same range of products, for example, same-day value pooling may be offered through one partner bank but not another. Each country also has a different legal framework to deal with, which will affect the documents and regulations that apply to corporate clients (it should be noted that this is also true for network banks as well).
These issues are being addressed through service level agreements (SLAs) between partner banks to ensure that the same level of service and range of products is offered by each partner bank in every country. The concept is also evolving towards one partner bank within regions, e.g. Western Europe, to ensure the same consistency of service that network banks are currently able to provide.
In addition, while partner banking is an effective proposition for corporates that need high quality local services and coverage in their domestic market; working with a central processor is an option for corporates who want an international cash management solution across a number of countries. The term ‘central processor’ refers to a global bank who has access to different local clearing systems and can process payments centrally for corporates based on information from the local clearing systems. Central processors are not visible in each domestic market but instead offer their services, e.g. payments and cash pooling, through cooperation with other banks (who are not direct competitors) on a white-label basis. This enables the central processor to offer standardized cash management solutions through a single point of access.
Depending on each individual corporate, partner banking or working with a central processor are both viable options but the combination of both is a strong proposition.
Corporate Business Benefits
With the introduction of SEPA, the EU will become a domestic market for financial service companies. Corporates will therefore demand higher quality local services, such as payment services and credit facilities, working capital and liquidity management. Partner banking can provide corporate clients with multiple local contact points and access to local services through the expertise of partner bank branches in each country. There is no doubt that local bank branches have better knowledge of their local customers – in terms of language, culture, local tariffs and regulations – than the branches of foreign network banks operating globally.
As mentioned before, corporates have increasingly sophisticated requirements and expectations. For example, most large corporates want to reduce the number of banking relationships they have and the number of transactions they process to reduce costs and increase their control and risk management over bank accounts. In addition, the information supplied by banks is fundamental to a corporate’s business and cash management, e.g. real-time information and the ability to track or trace transactions for their own customers. Partner banking can help address these requirements.
For example, partner banks can streamline the procedures for account opening for their clients. This includes co-ordinating the account opening process, holding copies of each bank’s account opening documentation, and advising terms and conditions in advance along with the required documentation for the account to be opened. This can provide business benefits for corporates, such as reduced administrative costs and a single point of contact for all account opening requirements.
A further trend among corporates is centralisation of their cash management and payments functions into one country through one bank, shared service centre or payment factory. Though the treasury functions are transferred and consolidated into one location, corporates will still be operating and doing business in multiple countries and therefore the concept of partner banking remains valid. For instance, services, such as cash handling and fiscal advice, will be needed and partner banks can offer these based on local competencies.
The Future for Partner Banking
The debate over the benefits of partner banking versus network banking is likely to continue. However, as discussed in this article, although network banking offers standardised products and services, the high cost of proprietary networks and infrastructure maintenance fees means that it is unlikely to remain a viable strategy for most European banks, especially when the priority is to lower costs and increase revenues.
Partner banking offers banks access to multiple branches within countries without the need to make infrastructure investment and also provides corporate clients with dedicated local services based on local expertise as well as multiple contact points. A central processor, on the other-hand, can provide corporates with a standardised international cash management solution via a single point of access. The combination of both is an effective strategy.
Partner banking has proven business value for both banks and corporates and, most importantly, it is one that is adapting to meet the changing demands of the industry. This will certainly ensure that it continues to be a strong proposition in tomorrow’s financial services market.