Creating a Banking Network to Best Serve Corporates
Recent market developments, such as the single euro payments area (SEPA), have forced corporates to re-think the relationship with their respective banks. The SEPA initiative introduces a new pricing model where cross-border payments made in euros will be charged at the same rate as domestic payments. SEPA will effectively remove higher tariffs and other barriers to cross-border efficient banking within Europe. Ultimately, the whole idea behind SEPA is increased competition, European trade facilitation and cost reduction.
The initiative from the banking community is also driving standardisation of services and access to these services. Under SEPA, corporates can move anywhere in Europe – although at least over the coming years local banks will still be necessary as processors for local collections – with no difference in terms of corporate banking and cash management. In addition, they are demanding the same ‘look and feel’ in terms of products and services wherever they are. Banks can also serve corporates more easily outside their domestic markets. As a result, European banks are feeling the pressure to offer tailored services to attract and retain corporate customers, or watch their clients go elsewhere.
Most large corporates have complex banking relationships in terms of the number of banking partners they have, so many are making efforts to streamline and consolidate these relationships. Some are looking to reduce to one provider but are concerned that one bank won’t always be able to provide all of the payment options desired in all of their European locations and beyond. For example, large multinationals in Europe have started managing their transactional business on a pan-European basis. That triggered the question about what to do with the remaining local business. This trend also brought a new perspective to banks – should banks focus on the relationship or on products? Simply focusing on products would only drive banks towards the commodity trap.
The issue for banks and corporates is that the dynamics of their relationship will change dramatically due to market developments. While only a premier relationship banking status will be able to provide the ‘bread and butter’ to banks in the future, local banks will have to re-think their client relationships and respond strategically to the changing dynamics. Corporates and banks will face tough choices; some banks have already made these choices. For example, we can distinguish a group of banks that primarily focus on clients that want to do business on a pan-European basis, while on the other hand we see large local banks (in-country power houses) that have started to provide products rather than international relationship banking. How can corporates and banks balance their needs and respond to this market trend?
Corporates are actively looking for the best service from their providers in terms of their financial logistics needs. In the marketplace, banks that previously focused on building up their own network – trying to offer everything everywhere – will start to realise that even with the largest network they won’t have the complete reach necessary to support all of their client requirements across the globe. Take a corporate’s need for local cash and/or cheque collections in different countries, for example. As the local requirements differ greatly per country, there would always be a capability gap left, which means that corporates would have to perform analysis into what extra coverage they need, which requires time, effort and investment. Instead of looking for a solution from a single global network bank, corporates could be looking for a bank that can play the role as broker between them and other banks (and even non-bank service providers).
As all banks have their own indigenous network, the best way for banks to adapt to this new market development of greater regional coverage is to look for alliances that allow the ‘broker’ bank to meet the requirements of customers wherever their business is located. The idea is not to be tied specifically to one partner, but have access to the right partners with thousands of branches to provide a stable service to clients. What is important is that the service remains consistent and that each bank has the right connectivity to provide the same access, deliver on time and serve the customer well. This is the co-ordinating role of the broker bank. SEPA facilitates these cross-border alliances and will establish the foundation in Europe to make it easier for all parties to create these relationships.
But many corporations are also looking for service provision outside of Europe and the broker bank approach can facilitate this extension as well. For example, if a corporate needed services in the Ivory Coast, it could use one of the global network banks, which would probably have a representative office there with a few people. Could they really provide the service needed by corporate treasurers? The answer is no, because it would only be a rep office with limited resources. The corporate should instead consider a European bank that could partner with a local bank to offer access, delivery and service (ADS).
ADS sums up what is needed in a nutshell. As the globalised economy develops, it becomes more important to partner in order to get access and connectivity to a range of services in multi-locations, instead of just having big factories of processing units. Moreover, when the broker banks – in addition to providing the right connectivity and customer support – also offer the right services, such as an integrated portal with a single point of access for cash management, trade and treasury transactions, then one is truly providing a one-stop shop for its customers.
There are roundtable events where even competitor banks sit together because only the processors compete on the actual transactions and not the banks themselves. Those aspects of payments processing have become a commodity – so what’s the value-add of banks? The value-add that banks can provide – and an excellent way to differentiate themselves – is to facilitate and provide an end-to-end service and the information around the transaction in order to allow clients to manage their liquidity more effectively.
Banks must be able to respond to corporate needs because it is the corporate community driving the agenda for innovative solutions by partnering with banks, but also with suppliers. Looking at the SWIFT Trade Services Utility (TSU) for example, which is a collaborative centralised matching utility, initially this was just within the bank space, but in today’s world there are corporates and suppliers involved as well. Bringing corporates and suppliers to the table as partners increases their input and partnerships will grow as competition increases.
The partner strategy should not begin and end with other financial institutions. SEPA demands that banks be more flexible and innovative as well as act quicker. The way forward for banks is to partner with clients to talk about innovation – fundamentally ‘co-innovation’ or the co-creation of products because that is what clients want. That’s the partner they need – not so much the partner that has all the transaction capabilities right in-house.
In the past, it was important to have local access to each and every clearing house, but the financial services industry is moving towards standardising the access to clearing houses and payment formats. Now it’s easier for banks that do not have a network in each and every country to adapt without having the legacy of branches within their operational units. That gives these banks a cost advantage because they can provide lean and efficient operations that have been developed with the latest technology – SEPA compliant and without the burden of legacy systems that many of the big banks have at the moment.
In addition, a bank must be able to follow its corporate customers wherever they are in order to maintain that client relationship because they are looking for global connectivity. Broker banks that facilitate the relationship with local banks can effectively gain a wider reach and provide cost efficiency, access, delivery and service across the globe.