The Changing Nature of Today's Corporate-to-Bank Relationship
Every corporate treasurer wants improved visibility and control over their global cash, which is precisely the type of capability they are looking to their banking partners to provide. The corporate-to-bank relationship is a fundamental business partnership but because of responses to regulatory and competitive pressures, this relationship is undergoing considerable transformation. Today, more than ever before, corporates require their banks to be both the solution provider and consultant for all of their global cash management challenges.
A few years ago, when credit was readily available, corporate treasurers were able to seek funding from sources other than their traditional banking relationships, such as capital markets. This afforded corporate treasury with a certain level of independence, reducing the importance of credit in defining their banking relationships. The impact of the recent credit crunch has once again underscored the significance of a strong credit relationship with an organisation’s banking partners. Yet, today, many corporates are seeking to rationalise the number of banking relationships in order to reduce costs and decrease the complexity of managing a multitude of accounts and relationships. Trying to balance banking needs with cost containment can often be a difficult proposition in treasury. The volatility of the capital markets has forced corporates to re-consider this rationalisation and instead ensure that they have enough bank relationships with strong financial credit lines to support their businesses.
Corporate treasurers are also under considerable pressure to maintain compliance with numerous industry regulations, which require tighter controls and better visibility into global corporate cash balances. Maximising cash as an important asset dictates the need for efficient handling across business operations, further accentuating the need for accurate, timely information surrounding cash flow, as well as the ability to move cash quickly for debt reduction, investment, or cross-business funding.
Globalisation has also had a significant impact on the bank-to-corporate relationship, manifested by the increasing need to support global trade regardless of the size of the business. Banks that have historically managed domestic payments are now asked to initiate and receive a vast array of international payment types on behalf of their clients. In response to competitive market pressures, businesses continue to look for ways to reduce the cost of goods sold. Companies that at one time outsourced their manufacturing or services to domestic companies as a means of lowering costs, are now exploring overseas options that can further cost reductions. Operating in this type of model means that corporates must gain an intimate understanding of local laws and develop a strategy for maximising their cash flow in these emerging markets – knowledge and insight they are increasingly expecting to receive from their banks.
Some of the larger banks are already looking at capitalising on these changing industry dynamics and have begun to invest in new capabilities that will enable them to retain and attract new customers. But it is by no means an indication that adapting to the changing expectations of corporates is a simple task. Responding to these new and dynamic challenges will require banks to re-evaluate their strengths, weaknesses, markets and service offerings in order to determine how they will successfully compete on this new playing field.
Banks, which have traditionally favored a siloed approach to product offerings, are beginning to consolidate back-office operations and products so that they can be used by customers in ways that the client prefers. For example, in many financial institutions, trade finance has historically resided within the institutional side of a bank’s operations – rarely intersecting with the cash management side of the business. Today, we are seeing the convergence of trade and cash management, which will result in changes to infrastructure, people and services. Although this convergence will require careful consideration when integrating these two different lines of business in order to best meet changing market needs and dynamic client demands, it is a positive step forward.
Corporate clients are changing the way they do business as well, which also affects the bank-to-corporate relationship. For example, while cross-border trade has quadrupled in the last 20 years the use of traditional trade finance instruments such as letters of credit (LCs) has declined. This shift has been attributed to the prevalent use of the Internet for the sourcing and purchasing of goods. As a result of moving to open account trade, banks have been disintermediated from the financial supply chain to some extent, reducing service fees and leaving them looking for new ways to add value in the financial supply chain.
There has been a tremendous amount of effort with regard to moving towards electronic payments. In doing so, businesses have come to consider electronic payments as a commodity – inexpensive and easy. This payment commoditisation poses a significant challenge to banks. As banks move customers from pricier paper payments to inexpensive electronic payment formats, fee revenues have quickly decreased, forcing the banks to identify additional services around the payment that have the potential to create new streams of revenue. Banks are now focusing on the processes and information surrounding payments rather than just the payment itself, which brings us back to trade finance. Within trade finance, there exists the potential for scenarios enabling a buyer’s bank to offer financing to a seller who might be cash short, leveraging the reputation of the buyer with whom the bank has a relationship.
Corporates have clearly indicated that they want better cash management and cash flow forecasting tools from their banking partners. The dilemma for banks, however, is a classic catch-22 scenario. On one hand, holding idle balances is a mainstay for bank revenue, yet by working more closely with their corporate clients who wish to manage those cash balances more efficiently, those idle balances will be redeployed. As a result, banks must find the balance between meeting their clients’ demands for improved cash management and the loss of revenues from holding those balances. This may result in new services, such as investment products tied to level off balances. The competitiveness of the global banking market is only increasing and the customer relationships that are strengthened by providing better cash management tools may help to provide banks with the competitive advantage they seek.
Regulatory issues and increased infrastructure costs are also driving corporates to explore more efficient ways to deal with their banks on a day-to-day basis. For example, today if a corporate wants to look at their payment obligations across a variety of payment types, it’s usually necessary to access multiple applications to view different types of transactions, such as cheques or ACH or wires. Corporates faced with this type of scenario are required to consolidate data from several spreadsheets in order to make strategic decisions based on their cash position.
What corporates are really seeking is a more efficient means of dealing with the banking partners and services they provide. And this can be achieved through the use of a consolidated view of all transactions (incoming and outgoing), accessible through a single web-based interface. Rather than having to learn by phone that their payment transaction failed in the back-office, a single web interface provides the opportunity to be alerted at entry – through the bank’s Internet channel – that the payment data is incorrect and requires repair.
It is clear that banks face the challenge of creating and offering a next generation of more efficient, streamlined web-based tools to meet the needs of their corporate clients. The industry has reached its tipping point of change and in the next three to five years, we are likely see the introduction of new solutions that leverage service oriented architecture (SOA), for example, as a way of helping banks maximise their investment in cash management solutions.
Fulfilling the expectations of their corporate clients will not be an easy task for banks, especially at a time when there is little excess cash available for investment. It is investment in technology and new value-added service offerings, however, that will underpin developments within bank-to-corporate relationships, and banks must stride forward if they are to retain their client base and meet customer demand.