Pulling together

01 November 2006Features

Banks are now under more pressure to respond to the changing needs of corporates. How is this relationship changing and what technology are the banks using to manage the corporate relationship

Large multinational corporations are engaging in more financial services-type activity every day, whether it is direct activity from their treasury, their working capital needs or their treasury management functions for their payables and receivables to their customers and counterparts. A few corporates, like car manufacturing giant Ford, have even established their own industrial banks or subsidiaries to provide financial services to their business. All are under pressure to operate more efficiently and with more quality in the way that they control their finance.

As they move more into the financial space, corporates are subject to more scrutiny which is making them take a longer, harder look at what they are doing in their own treasury functions from a regulatory and compliance standpoint. Their financial services companies are becoming subject to the same regulation that the banking community is subject to already.

Even if they have not gone that far as to set up their own financial entity, regulations, such as Sarbanes Oxley, are weighing on the shoulders of corporates with special focus on transparency, how profitable they are and the way in which they report results. This means that both banks and corporates have to have better controls. “There is huge pressure on treasury groups and corporate treasurers to make their organisation efficient and anything that banks can do to help that will cut their costs making a win-win for everyone,” says Maurice Cleaves, the newly appointed managing director and head of regional product management, Europe, at Deutsche Bank.

Michael Bellacosa, vice president and group head of product management for global payment services, The Bank of New York, agrees. “The trend that we see is most companies realise that they cannot simply send payment data to the bank, use the bank’s hardware system to initiate transactions and then forget about it. The growing trend is for banks to provide more detail back to clients regarding those specific transaction information such as customer reference information, bank references, and detailed proof of payment.”

Regulation

The regulatory clampdown is also affecting a change in the treasury function. Robert de Gidlow, sales consultant, JPMorgan Treasury Services, says: “Ten years ago the treasury function sat in a silo, and was just primarily responsible for a bit of corporate finance and foreign exchange and some high level cash management. I think now that the advances in technology supporting a corporate’s underlying business activities allows the treasury function to get so much more involved in all parts of the business. Again part of that is because they’ve had to — Sarbanes Oxley is a great regulation because corporates have to give more rigorous reporting which needs a centralised view.”

He believes that systems integration is the key to get this centralised view and that banks need to be able to talk to their client’s enterprise resource planning systems and, in some cases, the treasury management systems as well. “What corporates require from a bank is much more integration because without the integration of the relevant information on all lines of business that the treasury is now getting involved in, you are just not going to get an efficient, operational and centralised treasury.”

Historically the banks have told the corporates that they must configure their systems to be able to talk to the banks’ proprietary formats. The corporates are now rebelling against that — they want to make their centralised treasury operations more standard and fundamentally talk to JPMorgan in the same way they talk to HSBC.

Richard Spong, solutions marketing manager, financial services, at Sterling Commerce, a business process management firm, says that the corporates are not looking to make huge investments and have technology thrust upon them by the finance sector. “That is not what the banks would want as well because if you are trying to encourage customer loyalty you don’t really do that with £150,000 bill for new technology that is mandatory in order to continue normal banking services. The idea is to try and do that without inflicting high costs on the corporates, in fact make it easier for the corporates to do business and much easier for the corporates to get real time information in various departments where they have cash flows, ultimately in the treasury so they can be sure of their reporting accuracy,” he says.

JP Morgan’s de Gidlow argues that the responsibility of investing in technology has to be a joint effort. “We could — and do — invest millions of dollars every year to provide integrated services to our corporate community. It is no good if, in their own environment, they haven’t configured their systems to accept the type of electronic transmissions that we will provide to them — so it is definitely a two way street.”

But the cost of integration can be prohibitive and can affect corporate behaviour. “What you are seeing is corporates simplifying their banking relationships because the benefits from integration are significant — but you can’t afford to do that kind of integration with that many banks,” says Ed Glassman, head of global transaction delivery, Transaction Banking, ABN Amro.

Abhay Kumer, director of corporate development at SAP, a customer relationship management, ERP and supply chain management software firm, agrees: “Corporates are demanding the single interface where they can talk with multiple banks at same time. Global companies operate with 8 to 15 bank relationships and each of these interfaces and this can cost around €20,000 to €50,000 per year just from a maintenance standpoint. And it is not only the cost but also managing the technical complexity that is difficult. The corporates want a system standard platform with one interface.”

Relationship

So it comes as no surprise that the corporates are getting organised in order to make their voices heard. They are demanding that the banks respond to their needs quickly and flexibly — or they will move to another bank. Most corporates are already multi-banked and can easily move wallet share from one provider to another. Banks are feeling the pressure to respond or lose out.

Software giant HP is a large corporate operating in 170 countries. Hédi Ezzouaoui, director of financial markets at HP, talks about the problems associated with a wide geographical spread. “When we look at the services from banks in different countries, we can see they are different types of services, different appetites to take some credit risk in the countries, especially emerging countries, and non-standard or non-uniformed services available in each country. So if we operate with HSBC in the UK, it will be different from HSBC in Poland and HSBC in India, as an example. So corporates are expecting banks to be offering more consistent uniform services across countries. We don’t want to maintain 500 different connections to the bank — we want to be able to have some generic gateways to connect to the bank and have the complexity geographical spread hidden by the systems.”

ABN Amro is working towards this goal. Glassman explains: “The information that you get about your money varies market by market and instrument by instrument. We’ve tried to normalise that information so that the world looks like a much more consistent place to our customers. So they can have a single pipe into our global footprint and a harmonised set of information about what is going on for their accounts everywhere in the world.”

One view of one world — but this is just one aspect of a corporate’s financial business. Ezzouaoui adds: “This has to be done by the implementation of communications standards for the different aspects for our business. It starts at a purchase order from a customer, the delivery note, the invoicing, the payment and then the bank’s reconciliation. What we see as a corporate is all those transactions are performed manually for a part, automatically for another, but there is no end-to-end standard that is implemented today.”

An example of corporate access taking a step forward is the decision of Swift, the Brussels-based messaging standards consortium, to allow corporates access to messaging services previously for inter-bank communications. Corporates have had limited access to Swift since 1998 through Treasury Counterparty and Member Administered Closed User Group models, but the new category enables qualifying corporates to join a single closed user group containing many financial institutions, where corporate-to-financial institution SwiftNet messaging and file transfer are supported.

Not all banks have been keen to move to standards. Ezzouaoui comments that standardisation could be dangerous because of the potential volatility of customers. But the big banks, such as Deutsche, JPMorgan, Bank of New York and ABN, disagree.

Added-value

Deutsche Bank’s Cleaves explains that adding value to the service is the way forward for making the corporate customer more ‘sticky’. “Many of the core services that we provide are almost commodity-type services. We can do them, in fact any of the other large global banks can do them. Where we look to differentiate ourselves is on the value-added services around them: the quality of the information, the customer service and the implementation.”

Cleaves says that Deutsche Bank has been at the forefront of promoting corporate access to Swift, even though “it takes us out of the middle in providing that linkage between the corporate and the bank and there is some revenue loss”, but what it does do is enable the corporate to have a more efficient structure and allows Deutsche to standardise that across a large number of corporates and at the same time add value-added services to the back of it.

“Yes there are certainly some banks, the local indigenous ones, where this has been their bread and butter — let’s say the local clearers in some of the larger European countries — they would be perhaps a little reticent to embrace these common standards because they would lose large chunks of their business. But we, as a global provider of financial services, we look to give a global corporate a similar type of service wherever they are in the world, so you need to be able to standardise those practices that have been historically specific to one country or another,” he says.