Transaction services guide 2014: Corporate clients demand more

Over the past 10 years, the demands that corporate clients make of banks in global transaction services have changed dramatically. There are a number of drivers for this evolution. One key catalyst is the overall role of technology, which has been an enabler for changing corporate demands.

“From a treasury perspective you could say that the complexity and portfolio of responsibility of treasury has increased,” says Michael Spiegel, global head, trade finance and cash management, at Deutsche Bank. “Companies have been growing while at the same time needing to become more efficient in terms of productivity, which is where technology has played a big role. This was also seen following the financial crisis when an enormous amount of transparency was required. This was particularly the case for multinationals, which needed to know where their cash was and what sort of exposures they had in terms of credit, banks and currencies.”

Paul Simpson, head of global transaction services (GTS) at Bank of America Merrill Lynch, says: “Over the past 10 years, large corporates have become much more dependent on technology. A decade ago, even some of the largest companies were doing a lot of manual reconciliation and cashflow forecasting. As of five years ago, investment in automating processes and ERP standardization has really taken off, and this is allowing corporates to electronify and build their business in a way that is scalable.”

Corporates are also leaning on technology to deal with the increased demands of regulation and risk management. “In the case of regulation, one example can be seen in US multinationals,” says Deutsche Bank’s Spiegel. “They have to have a repository of the guaranteed exposures – the off-balance-sheet contingent liabilities – to prove where they have these. This requires a more efficient delivery mechanism. Also with risk mitigation, corporates have been looking to further enhance their risk mitigation in the overall flow business. They have always been good on credit monitoring, project monitoring, but now are increasingly focused on the visibility of where the cash sits and flows. They also require greater adaptability to respond better and more quickly to geopolitical challenges.”

Rajesh Mehta, head of treasury and trade solutions, EMEA, at Citi, says: “Risk management has evolved from a client perspective. In terms of counterparty risk management, corporates have moved away from wanting all of their eggs in one bank basket. Then there is the need to visualize exposures, to mobilize based on this and then once mobilized to optimize what you have. This could be exposure to different countries – thinking back to Egypt and the Arab Spring or more recently Russia and Ukraine – or exposure to conditions such as the low interest rate environment.”

Aside from the direct regulatory effects on corporates over the past 10 years, the indirect or unintended consequences of some new regulations have also changed the demands made on GTS banks.

“There are Basle III-induced concerns, such as what happens to the supply chain and suppliers that are in countries with a lesser rating,” says Deutsche’s Spiegel. “The overall financial crisis sparked a consideration among larger companies to look at enterprise risk in an end-to-end manner, starting with where the raw materials and semi-finished products come from, what the position of their suppliers is, all the way through to who distributes their products and who the end users are. There is an emerging deeper value chain and financing chain that corporates are looking at from an end-to-end perspective.”

The regulatory burden has an effect on the relationship between corporates and their GTS banking partners.

“Because of the increase in regulation and the way that banks have to approach this, if your bank doesn’t understand what you do and how you approach things, everything takes longer,” says Neil Hannaford, group treasury manager at Merlin Entertainments. “We want to move forward quickly so we want to work with banks that understand what we do and can work with us to get us over the hurdles that we face when operating in new countries and territories.”

Despite most banks claiming this is how they work, Hannaford is sceptical: “Some are adept at doing this, but some aren’t. That was the case 10 years ago and is still the case today. It can depend on the type of bank, what their approach is and how they are trying to position themselves. The ones that work best with us are the ones that work on that relationship basis and ask us what we do and what we want. It really helps us if they are prepared to get close to our business in that way.”

BAML’s Simpson says: “From a bank perspective, over the past 10 years, what we have been seeing and will continue to see is a demarcation line. Banks are either going to be one of the global GTS providers or a niche or regional provider. Which category certain banks fall into has also changed over the past decade. For example, there are Chinese banks and a couple of the larger Indian banks that are becoming global providers. Their networks are as vast as several of the established global providers. If you are a big provider and you don’t acknowledge or understand that, then in five or 10 years’ time you will probably lose a considerable amount of your business. Some of the large Chinese banks are building out branch networks and are entering major markets around the world. Their domestic corporate clientele is starting to go overseas, and as they do so, they are leveraging the relationships they already have with the Chinese banks.”

To respond to the changing GTS landscape and evolving corporate demands, banks have been investing in an attempt to bring benefits to their existing client base and win new business. Most banks have spent big on technology, which can bring benefits to corporates in a number of ways, as Deutsche Bank’s Spiegel explains. “We have invested heavily in the sophisticated technology that underpins today’s innovative solutions, enabling a greater degree of granularity in reporting, but also standardizing some capabilities and functionality across borders to ensure a consistent delivery,” he says. “This requires considerable investment, which is what we have done and will continue to do.”

Investment in the channels that GTS banks use has also been key to meeting the changing needs of corporate clients. Citi’s Mehta says: “Our investment in liquidity management and data – XML and electronic channels – has been as a result of us wanting to get more and better data, not just to feed transactional processing but also to achieve the enriched data necessary for clients’ risk management and regulatory reporting. Investment here services the evolving demands of clients in terms of centralization, efficiency and working capital.”

Investment in the products that banks offer has also changed as the demands from corporates, particularly on the treasury side, have grown beyond cash management. “We have invested heavily in the supply-chain and trade-finance piece,” says Citi’s Mehta. “As markets became disrupted, clients continued to go more global and there was a demand for more flexible trade-finance structures. We invested in the trade platform, more specifically the supply-chain export industry finance, things such as capital goods business and then commodities. Commodity finance is driven a lot by the flows you see between China and Africa, Latin America and Africa, and the oil-producing and oil-importing regions.”

In addition to investment in processes and products, most GTS banks also put a high premium on investing in people to attract and retain talent. “It is important to continue investing in talent,” says Citi’s Mehta. “As the business is always changing you have to continually review your talent profile according to the changed environment.”

Spiegel adds: “We also invest in people across the globe. We want to have top service and solutions: for example, we have created a solutions team within the transaction banking side. Here we invest a lot of intellectual capacity to thinking through the working capital end-to-end value chain of our clients. We look at using solutions that we have used in one part of the world and see how these can provide benefits in other parts of the world.”

As well as benefiting their clients, banks are finding ways to use the changing GTS landscape to their advantage.

“The regulatory environment is driving competitive opportunities for banks,” says BAML’s Simpson. “The banks that are willing to build capabilities or create solutions that are driven by the regulatory framework will see good returns on their investment. One example is in Asia, where some of the regional providers have invested in their capability to allow intra-Asia trade and trade flows, which has benefited them. You could also look at the US regulations, of which there are many. Dodd-Frank 1073, for example, had a very specific verification process related to consumer flows. We partnered with our consumer bank to develop a solution for our FI clients. And because we acted so quickly, we ended up being a provider to some of the largest banks in the US.”

The demands that corporates make on their banking partners differ depending on their size and footprint. “Large corporates have complexities in volumes and quite often are operating in more countries,” says Deutsche Bank’s Spiegel. “When we talk about investment in technology, this is not just on the bank side. These corporates also invest enormous amounts in the ERP systems and TMS. The complexity for the smaller corporates comes from the fact that they generally do not have shared service centres or the size and the scale of their larger peers, yet clearly want to benefit from developments. That is where banks have to find ways to bring offerings and solutions to those clients on a slightly different scale.”

The nature of the relationship between a bank and its corporate client can differ depending on the size of the corporate. “With a smaller client, banks can bring more of an advisory role to the relationship and work through what is happening to the corporate,” says Deutsche Bank’s Spiegel. “With large corporates, it is more often the case that we will work together with them to develop solutions in true partnership and see how together we can optimize their processes.”

The relationship between banks and their smaller corporate clients is a particular focus as the nature of small business is changing – SMEs are going global. “In the small business and mid-market corporate sector, we are seeing a massive migration overseas, particularly towards the upper end of the sector,” says BAML’s Simpson. “Around five years ago, approximately 95% of our SME clients in the US were content to stay domestic. In the past three years, I would say that 70% to 80% of that group are now going overseas. There is a huge investment by these companies to go international, because the CEOs and CFOs of these companies are keen to diversify their revenue streams.”

He adds: “There is a point to be made about the use and delivery of mobile technology by small and mid-cap corporates. If you look at how our clients are using it today, it allows them to control and run their businesses from virtually any location. Combine that with what we are seeing on the small business and consumer side – our consumer business has up to 12 million users of mobile a day and our small business area is also growing in this way.” 

Some differences in corporate demands emerge when different geographies are considered. “We have a number of different scales of activity depending on where you look geographically and our demands on our banking partners reflect this,” says Merlin Entertainments’ Hannaford. “For example, in the US our activities are reasonably developed and still expanding, so we have a certain requirement there where we need the cash-pooling arrangements and to consider overdrafts, for example. This differs in smaller countries for us where we just want an operational activity, so you don’t necessarily need a global bank for that. In this situation we would go and speak to a regional or local bank, because they know the market best.”

Difference in demand can also occur when looking at smaller domestic companies. “If you’re looking at a pure Asian company compared with a pure European company, the Asian company is far more focused on the growth stage of their cycle, whereas the European company is more focused on efficiency,” says Citi’s Mehta. “Compare these types of companies to a multinational that is operating across various regions of the world. There will be differences in their demands depending on which geography they are operating in. The advantage that multinationals have is that they will drive efficiencies everywhere. They will optimize in the areas that at that particular stage of the economic life cycle are not seeing growth by deploying more resources to these areas. Their optimization and resource allocation is broader and they have more opportunities to optimize within. They have the same needs as companies that are based purely in one region, but they have more levers to be able to manage these.”

Hannaford says: “We look at each market separately and don’t subscribe to the concept of requiring one bank for all of our activity. We look to see how it fits within the locality, as we need partners who understand the local market and can support our business. That is about being on the ground and engaging with these banks, so they are more likely to understand what we are trying to do. Those that understand it get the business, as they will be able to react to our needs, rather than try to sell us something that isn’t suitable.”

Some regional differences in demand from corporates can come from the difference in perception and developments of trends in different regions. Mobile payments provide an example of this. “In Asia or Africa, mobile payments have a completely different meaning and speed of development than they do in the developed world,” says Deutsche Bank’s Spiegel. “This applies when you go into transaction banking services for corporates as well. In the emerging world there is more affinity with technology and more openness at times. For example, it is perhaps more likely for a corporate here to use a mobile device to approve a treasury payment. In the western world, this openness may still take some time to develop. There are different speeds of technological advancement and uptake around the world.”

The transaction banking landscape has changed dramatically over the past 10 years and this evolution is well placed to continue. “Trends such as the quest for real-time information, greater transparency and the use of technology in a more intuitive way will increase as we go forward,” says Deutsche Bank’s Spiegel. “There are emerging industries where the speed of development is enormous. We are asked by some of our clients to be very flexible and to be able to think and move with them, develop ideas and help implement these in a true partnership. We need to make investments into our underlying systems to allow this flexibility without risking the stability of the systems. This is an interesting challenge to have, because the more you are flexible and interfere with your underlying operating systems, the less stable they are. We are putting the appropriate infrastructure in place so that we can respond to clients’ needs individually without risking operational efficiency and security.”

BAML’s Simpson adds: “A trend that is happening now, and which is only going to become more prevalent in the future, is that corporates will increase their reliance and dependency on banks to be trusted advisers and implementers. We have built a dedicated team to specifically provide this kind of advisory expertise. The team is made up of ex-treasurers, CFOs, and tax and shared service professionals. The reason driving this trend is that corporates are being tasked to become more efficient and complete more complex projects, but they are not being given additional headcount.”

The issue of being asked to do more with less is a concern for corporates of all shapes and sizes. It will continues to be an area that requires careful management. “We have worked with some of the most dynamic companies in the world that have asked us for advice about how to fix or change a treasury-related issue,” says Simpson. “If they are happy with our recommendations, and the resulting savings, we are then asked to implement the projects and help drive the savings. We are seeing more and more large corporates make these requests across treasury, FX, shared service centres and in-house banks in some of these.”

The regulatory burden, which has already made an impression on the relationships between GTS banks and their corporate clients, will also continue to have an effect. “Basle III will affect the way that banks and their clients look at their mutual relationship,” says Citi’s Mehta. “Capital allocation at a client level will require support by a fair amount of non-capital-related revenue. The buying process and the nature of the relationship will evolve as some funding mechanisms become more difficult or expensive. That is the big factor to consider.”

He adds: “The whole client service experience is really getting a whole new meaning. The client experience needs to become more consistent. You have processes that were interfacing bank and client domestically that are now interfacing at a more centralized place. You have a different product mix used. There is a lot of investment and thought going into that.”

This will continue to be a key issue for corporates. “If you are an international company, you have got to be able to have confidence that when your banking partner says they can deliver in a certain country, that they will do that in a coordinated manner,” says Merlin Entertainment’s Hannaford. “Communication is an area where banks can let themselves down. This can lead to the corporate having unrealistic expectations of what they can achieve. If more banks can improve this, I would be happy.”