The wholesale payments and cash management (PCM) business is still largely dominated by a small number of main banking players in each major European country. This industry structure has been a key contributor to the banks’ historic high bargaining power over corporate customers. But an oligopoly is not all banks have in their favour: PCM products from banks to corporate customers are dominated by proprietary formats and connectivity methods, so a corporate customer wanting to switch from one bank to another has to deal with the high complexity of infrastructure change. This creates high barriers to switch banks for such services.
Industry Initiatives Changing the Landscape
From a corporate customer’s perspective, however, industry initiatives, such as the single euro payments area (SEPA) and SCORE (SWIFT’s latest corporate access model) are likely to change the situation dramatically. In the next five years, the bargaining power that currently resides with the banks (suppliers) could well shift to the corporate customers (buyers).
SEPA, if implemented as planned, is likely to lead to consolidation of banking relationships by corporate customers across Europe. The drivers for this change are compelling and include:
- Simplification for the corporate around banking relationship management, IT connectivity infrastructure and message formats.
- Increased liquidity management efficiencies especially around the speed and value dating of end-of-day liquidity sweeping.
- Alignment with the current trend of corporate customers consolidating their fragmented operations into payments factories.
The hindrances to this change are likely to disappear over time with the standardisation of message formats and connectivity methods and the decrease in paper payments volumes. The current obstacles include:
- Complexity in infrastructure change when switching banks.
- Local paper-based collections and cash and cheque clearing requirements in different European countries that may not be so easily consolidated.
- Certain local nuances that are thought to be best served by local banks e.g. drafts in Italy or US$ cheque books in Ireland.
This consolidation of corporate banking relationships will change the parameters for banking partner selection. While most corporate decision-making for PCM services used to be on a country by country basis, it could now be driven by choice at a pan-European level. This could result in a fragmented European payments market with 20-25 main banks competing for corporate PCM business. At the same time, the adoption of standard payments message formats such as ISO 20022/XML, and standard connectivity method such as SWIFTNet are likely to reduce the barriers for corporate customers to switch banks. For the corporate customers, it will enhance the choice of service providers and also their bargaining power.
Given this emerging highly competitive scenario, the banks will have to make certain strategic choices. Do they compete actively for PCM business and use it as a differentiator in the corporate relationship? Or, in effect, do they ignore complex PCM business and focus instead on customers who value other corporate banking products more and only require limited PCM services? The banks that decide to follow the former strategy could well be at an advantage in a credit crunch scenario as PCM revenues are transaction- and deposit- driven and therefore much less capital intensive.
Corporate Challenges and Bank Proposition Considerations
Corporate customers face several challenges today in the payments and cash management area as illustrated in the table below:
In addition, there are other immediate challenges to be faced, such as incorporating IBANs and BICs into invoices and payments; getting ready for Faster Payments in the UK; and getting ready for SEPA in Europe.
In these circumstances, a bank needs to consider its PCM customer proposition along three key levers in order to attract corporate customers and build competitive advantage:
- Enhance its proposition by adding appropriate value added services that address the key PCM challenges identified by corporate customers.
- Minimise the change effort for corporate customers to start using IBAN/BIC, SEPA and Faster Payments.
- Make it easier for a corporate customer to migrate or consolidate its current multiple banking relationships with them.
The likely difference between the market leaders and common herd of the future will be in the timing of development of these capabilities. In the past two decades, there has rarely been a time when banks’ change budget has been so focussed on payments and cash management as it is now. The banks that ride the current payments transformation wave to develop a strongly differentiated capability are likely to emerge as winners in the PCM business.
While some banks are focussing on the first two levers to enhance capability, very few banks are concentrating on the third, which is critical for success in the current business relationship consolidation phase. One of the major factors contributing to corporate hesitation in consolidating their banking relationships is the complexity of infrastructure change required, such as new connectivity and formatting throughout the corporate customer’s subsidiaries and locations. Banks can gain an advantage by incorporating these major infrastructure changes at the corporate-to-bank interface as part of their service. In order to do this successfully, banks can choose to partner with the appropriate external vendors to handle the complexity and volume of change.
Conclusion
In the likely scenario that banking relationships for PCM business will consolidate, banks need to think beyond simple compliance with regulations. They must instead focus on answering strategic questions, including:
- How much business does the bank risk losing if it does not offer a compelling pan-European PCM product suite?
- Can the bank win in the increasingly competitive and fragmented market structure?
- What are the characteristics of the bank’s PCM offering that best suits their clients needs and also generate value for the bank?
- How can the bank integrate these requirements as part of the current payments change in the bank?
Even though the answers may vary form bank to bank depending on their customer segment focus, both by size and industry sector, their current capability and their future aspirations, a holistic PCM strategy is just too important to ignore.