A Transatlantic View of Cash Management
Over the course of the last few months, we have had the opportunity to sit down with corporate treasurers in Europe and the US for some frank conversations about cash management and the dynamics of the corporate client/bank relationship. While the size of the organisations may have been different or the scope of business varied, it was quite clear to me that the corporate treasurer’s view of the globe is changing dramatically. Fuelled in large part by the mass globalisation of business, the parameters that once defined the relationship between an organisation and its banks are quickly being scratched out and redrawn.
What we find particularly interesting within this new paradigm is how banks in the US and their counterparts in Europe are responding to what amounts to a new playing field. They are very similar to a set of twins. On the surface, genetics has helped construct two nearly identical individuals but with two distinct personalities, two distinct sets of likes and dislikes, and two very distinct approaches to solving complex problems.
If you have been involved in this industry long enough, you will remember a time when the relationship between corporate treasurers and their banks was very different than today. Back then, most US corporations, for example, initiated and processed the majority of their payments in-country. In many cases, the treasury function involved a single in-country bank and any international or cross-border payments – there usually weren’t many – were handled through corresponding bank relationships, and letters of credit were commonplace.
But by 2005, burgeoning economic growth in emerging markets and the proliferation of web-based technology solutions really began to wash away geographic boundaries and the distinctions that existed between the international payment needs of large and mid-tier corporations. As a result, corporations large and small suddenly found themselves transacting business in countries – and in currencies – previous unknown to them. To offset these new cash management challenges, corporations actively sought banking partners with the resources to provide transaction and reporting capabilities into specific countries and regions. This approach, however, meant a sizable increase in the number of banking relationships and, unfortunately, an alphabet soup of IT solutions that offered little in the way of cohesiveness and real-time visibility.
As a result of globalisation, organisations now require in-country bank accounts for local autonomy while regulations such as Sarbanes-Oxley impose the need for centralised control and near-real time visibility. When you combine the lack of consolidated reporting on global transaction activity and cash balances with strong borrowing power through the capital markets you begin to truly understand what’s at the heart of forcing corporate treasurers to re-think their approach to cash management. Today, when we speak to corporate treasurers, the conversation inevitably focuses on reducing the number of, and therefore costs associated with, global banking relationships, attaining visibility into transaction and cash balances on a global scale, and leveraging a strong cash position as a mechanism for operating their business.
In the realm of cross-border payments, Europe has always been king. While banks in other parts of the world have struggled or been slow to catch on to the intricacies of initiating a payment in one currency and completing it in another, European banks have gone about their business like clockwork. However, the advent of the single euro payments area (SEPA) is threatening to alter the landscape for good. Although widespread compliance with SEPA may ultimately take longer than expected, the new rules and regulations governing European cross-border payments will become a reality. And when that happens, Europe’s banking landscape will have a decidedly ubiquitous environment. It will be based on a regional banking model quite similar to that of the US.
On the other side of the Atlantic a different scenario is playing out for US banks. With more and more corporate clients expanding their businesses overseas, US banks (including many super regionals) are increasingly finding themselves faced with new cash management challenges. For the most part, cash management for US banks was traditionally defined within the confines of single currency and single language. But as SEPA pushes European banks toward a ubiquitous banking landscape, US banks are moving in the opposite direction. The vast majority of US banks are, for really the first time, now having to adjust their strategies and capabilities for initiating payments, reporting on transaction activity, courting new customers and satisfying existing corporate clients to meet the requirements of globalisation.
The notion of corporate treasurers rationalising their banking relationships isn’t talk, it’s reality, and banks need to be acutely aware of the mindset of their corporate clients and move quickly to service them or risk being left on the outside looking in. For banks, becoming an integral component of a corporate treasurer’s cash management strategy will be all about speed-to-market and agility. Building systems internally has historically been how banks have differentiated themselves. Today differentiation is about how quickly they can provide new and better financial services to clients that will set them apart.
Staying competitive will require a great deal of technological sophistication and a deep understanding of how to support the needs of an international client base. The European banks, largely due to their extensive experience in cross-border payments, have a leg up on their US counterparts in this regard. They also have the benefit of operating in a far less litigious society, which has helped present Europe, and more specifically London, as a more interesting financial centre for managing cash globally. The primary challenge for European banks will be to find a way to effectively control costs associated with changes dictated by new, regional regulations.
In the US, banks are not facing the same payment-centric regulatory mandates, such as SEPA, PEACH and UK Faster Payments. Freedom from the pressure of having to comply with new regional payment mandates has opened up a window of opportunity for the US banking community to capitalise on market opportunities faster then their European counterparts. But it’s likely that the window of opportunity will only be open for the largest US banks. While some have successfully adjusted to the payment needs of foreign cultures, developing systems and investing in the establishment of an ‘in-country’ presence can be an expensive and time-consuming proposition.
While competing on this emerging playing field may cause US banks to shift their focus away from down-market operations in the US, it may prove to be a catalyst for changing inter-bank relationships. We’re likely to see scenarios in which the top 10 US banks reach into the regional bank market, forming partnerships or making strategic acquisitions to ’round out’ their capabilities. These types of relationships could open the door to offering white-labeled global capabilities to regional banks and offering tailored solutions to regional banks’ small and mid-tier client base.
Rarely do comparisons between the US and Europe fail to fascinate. Despite the obvious similarities, each region possesses its own strengths and shortcomings. As corporate treasurers continue to rationalise their banking relationships, banks across the US and Europe will need to focus on addressing rapid changes in the global marketplace. In doing so, banks will find themselves in the right position as new market opportunities emerge.