Why it is not always the right course to remain loyal to and work exclusively with just one bank for a lifetime…
Treasury and its banks – an inseparable relationship that has evolved over many years one might think. As this relationship often grows together with the company, many do not realise until it is too late that the company has actually outgrown the relationship and that the banking partner(s) no longer fit the company's strategy. This article examines why you should regularly analyse your banking relationship and the services on offer, which factors you should particularly consider in doing so and which banking strategy would be the best for your company.
Your banking partner, and quite frequently also your various banking partners, are a key component of your enterprise and have major influence over your daily operations, especially in the area of cash management. The significance of this relationship is however much more far-reaching. The possibilities of strategic orientation and future development of an enterprise are also in many ways dependent on the banking relationship and/or access to the capital markets. The banking partner's backing is indispensable for financing acquisitions or other plans of expansion. On the operational side, geographic presence and meeting local requirements are important factors. As the regulatory requirements in many countries require physical presence of the bank for the payment of taxes and salaries, your banking partner must have a network of branches to accommodate this in order to facilitate smooth business operations. One question you should regularly ask yourself therefore is: "Is my banking partner in a position to take the strategic next steps together with my company or have its limitations already been reached at this point?"
Such an analysis must be based on detailed consideration of all local and global requirements and prioritising these appropriately. What is the highest priority? Transparency on liquidity, its centralisation and thereby availability, or just optimising interest rates?
Especially cash management is highly dependent on the individual services and performance of the bank concerned. A range of requirements of subsidiaries (among others) with respect to banking services beyond cash management must be taken into account: e.g. for guarantees, financial instruments and payments including the various payment types and formats.
This analysis should be conducted early so that any gaps in a banking partner's range of services will not suddenly emerge as an impediment to achieving strategic goals.
A frequent problem which we observed at a client recently is as follows: an internationally operating corporation selected a few banks in the course of bank rationalisation, which are to assist the client on its journey to further expansion. Due to organic growth as well as changes in the local business model, the demands on the bank(s) soon changed in a variety of ways. The globally operating partner bank was not able to meet various demands, such as the required branch network, solutions for cash withdrawal or local corporate credit cards. Solutions could have been found for individual problems, however, in the end, it could no longer be justified to continue working with this partner so that new local banks had to be selected at short notice. The original idea of a single bank approach was therefore passé.
After a prolonged trend of rationalising banking relationships, many international corporations are now moving towards multi-banking, which involves several banking partners depending on the country and specific local requirements. Multi-banking is not really an entirely new approach, but the reasons why companies pursue this strategy are very different today compared to ten years ago.
The reason is not, as many might assume, risk control (especially considering the past financial crisis), and therefore risk mitigation, but the fact that major global banks are not in a position to fulfil all local requirements.
It is true that the major global banks advertise the extensive networks of local banks with which they collaborate, stating that these local partners and alternatively large partner banks would meet all conceivable local requirements. However, the reality is frequently otherwise in practice. Regardless of a single bank or banking partner approach, the individual negotiations and contracts must be individually managed in most cases. Just the KYC process alone requires a different degree of effort depending on the country in which the bank operates. KYC requirements have made opening a new account a protracted and complex journey for companies. On average, banks require one month (based on empirical values) to finalise the onboarding process. Apart from the time required, customers are requested to provide a virtually inconceivable amount of information and detail. Interestingly, the volume and content of information to be provided varies from bank to bank and even within banks from one European country to another. This is due to the central bank policy of the country concerned and internal compliance requirements of the bank involved. If you have an account for example with a reputable European bank both in Germany and the Netherlands and you would like to open another account in Belgium for instance, you will have to appear in person as the managing director.
Connections to banking portals within the same banking group also quite frequently require a lot of effort. Moreover, the online banking systems used are often different in each country.
In scenarios such as these we do not see any advantage in using a single bank approach given the complexity involved and therefore would advise against pursuing it.
Therefore, to find the most suitable banking partner(s), the first step must be to obtain clarity about one's own goals and strategic plans. However, treasurers often hesitate to analyse local requirements in detail: cash withdrawals, credit cards, branch network, local payments, card terminals, legal reasons, etc. It seems more important to many (especially under time pressure) to make 'swift' progress in order to be able to present management with specific progress in implementation.
In the above example, it was determined long after the strategic bank selection and the original RFP, and while implementation was already in full swing, that the banking partner selected was not able to assist with all local requirements. At this point, local processes had already been transferred to the shared services centre, including the support systems, a long time before.
As local requirements, such as lack of a branch network, could not be met in the periphery, the subsidiaries had plausible reasons to refuse the solutions suggested by headquarters, and also did so.
As a consequence, several local banking partners had to be added in order to meet all requirements. Due to the lack of sufficient planning prior to initial selection and the change in the course of direction occurring too late, the solution ultimately implemented was significantly more expensive and seriously delayed going live in the shared services centre. The initially insufficiently prepared decision regarding a banking partner from the perspective of the local entities significantly reduced confidence in the decisions taken by headquarters and therefore also fuelled doubt about the usefulness of the entire project. Earlier involvement of the local entities would have identified the specific local requirements and would also have ensured the buy-in and support from the local entities.
A single bank approach is a dream and remains so if it is contrary to business requirements. A multi-bank approach requires considerable effort with implementation in some cases to gain transparency and an overview of global cash balances. And, operating expenditure also rises as a consequence to achieve more efficient and centralised liquidity management, even if operating processes are almost entirely automated with the support of IT systems.
But, in the end, the only issue that counts is that subsidiaries are able to operate their own business efficiently. This does not mean that there should not be central responsibility for policies or central specification of the banking partner or the central provision of systems. On the contrary: these are needed to guarantee compliance and efficiency.
Source: KPMG Corporate Treasury News, Edition 84, September 2018
Author: Andrea Pohl, Senior Manager, Finance Advisory, firstname.lastname@example.org
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