As corporates continue to expand their banking panels for cash and trade, what are the implications for converged solutions offered by a single global bank? Liz Salecka investigates.
While the need to deploy converged cash, trade and foreign exchange solutions was once a central theme for global transaction banks, this focus has seen less emphasis recently, giving rise to questions over whether the idea of convergence was more hype than reality.
Although there were huge expectations that large corporates would consolidate their cash and trade activities with a single global bank offering an integrated solution, this has not turned into the reality once expected.
“We have seen a real change in corporate behaviour,”confirms Yann Leray, head of cash management UK at BNP Paribas, noting a shift away from the appointment of a single global bank. “With regards to the convergence of cash management, trade and fx, this is still quite elusive. I believe corporates are not necessary overly focused on convergence – although more than ever they feel they need to award their core bank with ancillary business.”
For many multinational corporations (MNCs) and large corporates, increasing the number of banks they work with – and diversifying their bank partners regionally –represents an important measure to mitigate counterparty risks.
“In my experience, every corporate today is multi-banked. Even small to medium-sized enterprises (SMEs) will have a contingency bank for risk mitigation purposes,” says David Hennah, head of trade and supply chain finance at Misys. He also points out that banks too are looking to spread risks and “not have too many eggs in one basket”.
“Cash management came to a turning point during the financial crisis of 2008 when counterparty risk management came to the fore and many MNCs now use different banks in different regions,” confirms Neil Daswani, global head of global corporates at Standard Chartered.
He adds that many local Asian corporates are experiencing rapid growth and want to have the best set of banking partners they can find in new markets. “They are looking for diversification of risk and bank specialisation in key markets,” he says.
Corporates operating in multiple overseas markets are also recognising a need to appoint more local bank partners on the ground to operate effectively and spearhead the growth of their businesses.
Dub Newman, head of GTS North America at Bank of America Merrill Lynch (BofAML) points out that MNCs often need to deal with a bank that has a branch presence to manage local paper collections and receivables – although, in many cases, global banks can do some of this too.
“Fx and trade are not solutions-bound by requirements to have operations on the ground – and this is also the case for liquidity management and the management of payables. But you really do need a local presence for collections, and in some ways, cash,” he says. “In the case of supply chain finance it is good to partner with a local bank but this is not a requirement.”
Convergence as a role
However, despite the fact that many companies are now using a wider array of bank services providers, global banks believe that their corporate clients will still look to achieve a converged approach to their cash management and trade activities.
Daswani argues that there is a balancing act now taking place – counterparty risk has come to the fore but corporates still need solutions that will improve their operating efficiency.
“We do expect corporates to continue looking for converged solutions and one of the key drivers is improving operating efficiency. Many of them have invested in enterprise resource planning (ERP) system projects and they now want to leverage on this investment.
“What might have happened is a slowdown in the hype surrounding convergence. In many respects cash and trade cannot be talked about in isolation by corporates as it can play a big role in helping banks to achieve their key performance indicators (KPIs).”
Daswani explains that there is still a general preference among corporates to use a lead bank in every region that they operate in. “A corporate may, for example, use a global bank for its overall liquidity management but then spread excess cash out among other deposit-taking banks,” he says. “In general, large corporates also prefer to use multiple banks for debt and trade finance but, within this environment, they will still tend to use one lead bank for their overall cash and trade.”
Similarly, at BNP Paribas, Leray points out that corporates do now tend to appoint a regional partner if they are focussed on minimising their number of counterparties. “However, in the last couple of years we have also seen corporates appointing two strong banks per region on the cash management side,” he says.
Newman at BofAML believes that even when corporates are dealing with different banks in several markets they are still likely to rely on one global bank to manage their wider cash, trade and fx activities. Large corporates typically use the services of a global bank to aggregate transaction data, pool liquidity and provide them with a seamless view of their global banking picture.
While some large corporates may look to work with one global bank to achieve a converged approach to their management of cash and trade, other options are available.
Hennah points out that the deployment of a third-party vendor solution can also provide corporates with the consolidated picture of their positions with multiple banks that they need.
“The key driver for corporates is working capital management. For that they need access to, and visibility into, information,” he says. “Many banks want to market their own branded portal as the corporate channel but there is definitely a demand in the corporate market for a multi-bank channel that enables corporates to consolidate data.”
Cashing in on convergence in SCF
One area where corporates are expected to continue taking advantage of convergence is payments and supply chain finance, which when delivered as an integrated solution by one bank, can provide them with a fully automated end-to-end process for the management of both types of payments to suppliers.
“Corporates want greater automation in areas like supply chain finance because they are reducing their treasury teams and are looking to do more with less – this can be achieved by introducing electronic capabilities,” says Dub Newman at BofAML, pointing out that in this way treasurers can focus more time on making high-value decisions.
“The question they need to ask themselves is whether by putting the two together with one bank they can create more economic value for themselves,” he continues. “If they provide us with their payment files and use us for supply chain finance programmes we can knit the two together.”
Meanwhile, Neil Daswani at Standard Chartered points out that if the same bank has a full picture of the payment and supply chain finance activities of a corporate client, it is in a better position to identify anomalies – and thereby help it to improve corporate governance.
“It does make sense to use the same bank for payments and supply chain finance. Apart from the operating efficiencies this helps the corporate to achieve, it can be taken to the next level with pattern recognition,” he says.
Here he explains that if a payment bank sees something untoward that does not match the established payment pattern then it can make use of enabling technology to assist a corporate intercept a potential fraud. “This is much better than waiting till the cheque presentment stage or funds transfer stage,” he says.