Cash Management Innovation Among the Turmoil
The digital dividend dominated the cash management market in 2020. Corporates responded well to those banks that digitalized the services they needed to stay afloat in the choppy waters of a global pandemic.
In recent years there has been much discussion about the internationalization of transaction banking services for clients who no longer recognize geographical limitations. A bank’s global footprint and its market power were closely correlated.
In 2020, the focus shifted towards consolidation. Coalition’s transaction bank index shows that cash management revenues in the first half of the year fell to levels not seen since 2016.
After a decade of continuous growth in global transaction banking revenue pools following the global financial crisis of 2008, the research firm anticipates a decline of 6% in 2020.
Interest rate cuts ate into profitability and quantitative easing resulted in unprecedented growth in market liquidity. Banks also received a boost from corporates drawing down on their uncommitted lending facilities during the pandemic in order to have cash on hand.
The leading cash management banks have had good reason to feel ambivalent about digitalization in the past. They acknowledge that this is where the market will end up, but they have also recognized that physical cash and cheques are more profitable.
However, the coronavirus crisis has banished any resistance they may have felt towards digital provision.
Banks that have invested heavily in cloud-based architecture, application programming interface (API) connectivity and the digitalization of traditional product sets – as well as in their human capital – have been best placed to respond to the wave of digitally driven transformations that have characterized the corporate space in the last 12 months.
The overall digital experience a cash management partner can provide across their entire commercial ecosystem – from driving efficiencies in treasury and operations to partnering for market share growth or to enter new markets – has never been more important to corporates.
Earlier in 2020, one global head of transaction banking told Euromoney that the year would be more about agility and less about returns as his bank focused on being able to deploy its balance sheet in the right countries at the right time for its customers. And so it has proved.
Despite this unprecedented upheaval across the industry, however, the top three placed banks in Euromoney’s non-financials cash management survey for 2020 remain unchanged: HSBC, Citi and Deutsche Bank.
HSBC has improved its regional rating for Africa, central and eastern Europe and North America, where it overtook last year’s top two of Citi and JPMorgan.
Citi took top spot from UniCredit in central and eastern Europe but dropped a place in Western Europe, while Deutsche Bank’s regional rankings were unchanged from 2019.
The corporate customer satisfaction ratings were rather more interesting. DBS retained top spot, but Bank of China has come from nowhere to second place, relegating HSBC to third. Citi remains in fourth place. In 2018, ‘best service’ rankings were incorporated into the cash management survey for the first time. These rankings are based on customer satisfaction ratings – the net score of clients who view a bank’s cash management services positively minus those that view them negatively. They provide a unique insight into which banks are meeting their clients’ needs best.
It is testimony to the consistency of DBS’s service to its clients that it was ranked first in every category (business functions, financial facilities, personnel, service, and technology provision) this year for the third consecutive year.
It also helps explain why DBS grew its transaction services fees by 8% to $200 million in 2019, led by cash management. Lower net interest margin from cash management was offset by higher loan volume.
DBS, reckons one of the main factors behind the bank’s strong performance in the latest survey is that it has delivered new services when customers needed them the most.
“Our customers regularly provide feedback about how we have delivered real world solutions through our digital capabilities and advisory, rather than simply talk about digital,” he tells Euromoney. “That is what counts for customers.
Customers have also reacted positively to DBS’s support for the communities it operates in across Asia.
DBS says interest in digitalization from corporate treasuries in sectors that have traditionally been less responsive to digitizing processes has led to clients reevaluating their cash management partnerships with banks.
“In particular, we are seeing greater demand from clients for bank partners who are not only able to meet their short- to medium-term financial needs to tide them through the pandemic, but also provide strategic value in helping their business develop and deliver on their longer term digitalization roadmap,” he adds.
Second-placed Bank of China has become a leader in international cash management services by actively expanding its basic settlement and services. Surprisingly, it is still the only one of China’s big four banks to have a global transaction banking business.
The bank has continually upgraded its product functions, improved its liability structure and accelerated the development of its cash-pooling business.
These initiatives have built on earlier work to upgrade its corporate online banking system and expand global integration for key cash management products, which is helping Chinese companies achieve sustainability in their overseas investments and operations.
Improvements in Bank of China’s global cash management platform have been a big factor in its growth. Having integrated its transaction banking services into a single department, it is well on its way to becoming a formidable competitor to other commercial banks.
Bank of China has correspondent banking relationships with around 1,600 institutions across the world, while many of its offshore subsidiaries have set up their own transaction banking departments, mainly targeting Chinese companies that are expanding overseas and Fortune 500 companies.
The bank has also been quick to adopt new technology. With the help of facial recognition and big data, it has streamlined the corporate account opening process and it is a participant in Swift’s initiative to improve the payments experience for small and medium-sized enterprises.
Transaction banking is an industry of ebbs and flows. There will always be institutions that decide for one reason or another that they cannot continue to service a specific market cost effectively, but in many cases, there will be other institutions that have eyed up these markets and feel that their profile and experience would be a better fit.
Despite retrenchment in some areas, banks will still go where their clients need them – an approach that favours global banks as long as they are able to service those clients and countries to the required level.
At a regional level, China continues to work through its Belt and Road Initiative, and the natural next step is for Chinese banks to expand into new territories. The results of this year’s survey suggest that Bank of China is the institution best placed to succeed outside its core market.
For HSBC commercial banking, revenues from global liquidity and cash management services increased by 6% to almost $6 billion in 2019. In the bank’s global banking and markets business, global liquidity and cash management services revenue increased by 7% in 2019 to $2.75 billion.
According to Diane Reyes, global head of liquidity and cash management at HSBC, competition has become even more intense over the last year as clients demanded that their providers meet their digital requirements for working from home.
“As the coronavirus crisis has accelerated the shift to digital, we have seen the value of the strategic decision we took several years ago to invest in digital and self-service tools that are fast, simple and secure,” she says. “This year we saw clients who were once reluctant to use digital tools – or saw them only as a contingency – recognize just how important they could be.”
A perennial theme is the extent to which clients are consolidating their cash management relationships. Reyes agrees clients are increasingly looking to rely on fewer core banks as they strive to achieve operational and cost efficiency, as well as gain greater visibility of cash positions.
“Managing a number of different banking relationships creates both a cost and an operational burden for firms, such as using platforms with different capabilities and technical requirements,” she says.
According to Mark Smith, head of treasury and trade solutions EMEA at Citi, the global cash management market has become more competitive over the last 12 months despite some banks pulling back from certain markets.
“A few big names have announced their intention to become new entrants,” he says. “We have had an environment where trade flows have gone through change and the channels have altered but it is still a global economy. For example, we have seen more clients who are based in Asia experiencing global growth. This demonstrates that clients need banks to bring them into the global network from wherever they are headquartered and reinforces the need for a global bank to support quick, effective growth in new markets.”
Smith suggests that during the first half of the year, lockdowns and remote working meant that the consolidation of bank relationships was not necessarily a priority for clients more concerned about managing risk and how cash flow could serve the underlying business.
“However, as we moved into the ‘new normal’, clients have been able to look back over the interactions they have had over the first six months of the year and ask themselves if they were going to go through this again what they would do differently,” he says.
“The answer they have come up with is more consolidation. Consolidation improves client risk management and improves their visibility and connectivity, all of which were very important through the crisis period.
“Covid has emphasized and accelerated the consolidation process and as we come into the latter part of the year, we have seen an increase in RFPs [requests for proposal].”
This year we saw clients who were once reluctant to use digital tools – or saw them only as a contingency – recognize just how important they could be. - Diana Reyes, HSBC
Outside the established players, Goldman Sachs has been ramping up its cash management offering in North America in a bid to take market share from the likes of Bank of America and JPMorgan in a segment reckoned to be worth as much as $85 billion annually.
Investment in cash management technology has become a focus for US banks as they look to prioritize availability of money management and forecasting tools, and Goldman is hoping that this will propel it into the top tier of cashmanagement providers.
Earlier in 2020, Hari Moorthy, global head of transaction banking at Goldman Sachs, told Euromoney that transaction banking and cash management had changed little over the last 40 years and was ripe for disruption.
But this does not take account of the sophisticated customer-facing portals developed by the likes of Citi, Bank of America, JPMorgan, Wells Fargo, BNY Mellon, PNC, Bank of Montreal and CIBC.
There are undoubtedly opportunities for institutions with the right digital strategy, client experience and product offering to gain market share.
As one analyst puts it, business is no longer solely won based on products and functionality but rather on digital experience and platform flexibility. However, the incumbent banks have an broad and deep set of corporate banking offerings, including advisory services.
Experienced relationship managers and treasury advisers work closely with bank clients to help them to make the right liquidity management and cash-flow decisions.
In April, Microsoft chief executive Satya Nadella suggested that two years’ worth of digital transformation took place in the space of two months.
This accelerated digitalization has been replicated across the transaction banking sector with banks building out their digital capabilities.
Among the top performers in this year’s survey, Citi’s mobile app user numbers have risen many times over.
In June, the bank introduced a payment outlier detection solution that uses advanced analytics, artificial intelligence and machine learning to help proactively identify payments that do not conform to clients’ past patterns of activity.
This allows clients to review and approve or reject such outlier payments via Citi’s institutional electronic banking platforms.
Elsewhere, DBS fast tracked its multi-year digital roadmap, including the introduction of contact-free digital capabilities for trade-financing solutions such as letters of credit and banker’s guarantees, ensuring corporate customers had continued access to banking lines to keep their businesses going during lockdowns.
The bank’s updated onboarding process has allowed existing customers to add new suppliers to their supply chains; enabled DBS – following due-diligence processes – to offer financing to new SMEs in their clients’ supply chains; and to offer purchase orders that come with interest benefits that are passed on to distributors within the supply chain.
HSBC launched a cash-flow forecasting tool on its liquidity-management portal that enables clients to stress test and model their funds at HSBC or with other banks. There has also been increased interest in its treasury APIs, which enable clients to check their account information or make payments from their own systems on demand.
HSBC accelerated the rollout of mobile remote-deposit capture in the US and Canada, enabling corporate clients to deposit cheques remotely by taking a picture on their phones. Internally, it has rolled out Adobe Live Sign, so that it can accept e-signatures for documents, and allowed client service teams to accept certain instructions via email, for example where clients were looking to update a liquidity structure.
“HSBC Green Deposits [launched in the UK, India and Singapore this year] have also proved very popular as they offer clients a simple way to use their operating cash to support environmentally beneficial projects,” says Reyes.
More than 88,000 clients downloaded the HSBCnet Mobile app in the first nine months of 2020, an increase of 155% compared with the same period in 2019.
The bank’s clients made almost two million payments via mobile in the third quarter (up 229% year on year), and the value of those mobile payments was $63.2 billion compared with $48 billion in the third quarter of 2019.
Looking ahead there is an expectation of increased activity and associated balances towards the end of the year and into 2021 as clients look to restock inventory when capacity and output increase.
Clients can be expected to start using some of the liquidity they have accumulated as economies recover and investment initiatives recommence.
Coalition predicts that a relatively rapid recovery in volume and the positive impact of stabilizing interest rates on expanded deposits will see the cash management industry reverse the losses experienced this year and record a 6% increase in revenues in 2021.
With corporates likely to reward the banks that supported them during the worst of the coronavirus crisis, it will be interesting to see if next year’s results reflect a shift in the balance of power.
This article was first published by Euromoney in Dec 2020.
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