Keeping It Local

With respect to certain aspects of corporate banking, local banks have been in retreat throughout the decade just passed. This has been partly due to an attack from global banks, especially in offering integrated cash and trade solutions via an IT platform. Local banks have also downgraded their own local relationships with corporates in favour of the centralisation of the credit process. This has in turn led to inevitable credit constraints in the wake of the global financial crisis. Yet developments in supply chain finance should enable local banks to take back the initiative.

Following the integration of the physical and financial supply chains, technological advances and the growth of working capital management, it is clear that optimal efficiency now lies in the full integration of cash management and trade finance – even for local banks.

In essence, integration means linking the cash and trade functions to enhance risk mitigation and maximise end-to-end payment efficiencies. This can be achieved through an upgraded and fully automated banking platform, capable of providing end-to-end visibility and highlighting elements of trapped working capital, as well as the elevation of local market knowledge to a global level.

The pressure is, therefore, on corporates' house banks to offer their clients such a service – and yet for many, especially local banks under financial pressure, doing so is not a priority. In the aftermath of the crisis, this is understandable, especially seeing as integrated treasury solutions can come at high cost and an extended time-to-market.

By pushing the issue aside in favour of seemingly more immediate concerns, local banks are, however, missing a trick. The ultimate solution for local corporates is a local banking solution that can also meet their needs, in terms of automation and convergence of cash and trade. The ability to offer their own clients an integrated platform would allow these banks to resume their places as key players in the supply chain. This is also made possible by regaining insight into client needs and being able to retain and expand business, through the offer of bespoke treasury services. If local banks can achieve this, it will lessen the likelihood of their losing business to global banks.

Changing times

As well as lending, often underpinned by a thorough understanding of their clients' business activities, local banks previously had two core offerings to local businesses: trade finance, most often involving risk mitigation products such as letters of credit (LCs) and cash management, i.e. the optimisation of cash on behalf of businesses. These two functions have been converging over the past decade, partly because changes in trade patterns meant trade-related cash flows have lost much of their risk profiles, and partly because IT developments enable banks and corporates to take a holistic view of the supply chain.

Although this apparently threatens the role of local banks, it could in fact create the opposite effect. The crisis induced a need for heightened risk awareness, and the integration of cash and trade presents an opportunity for banks to re-establish their relationships with their local corporates.

Although most large global trading banks have developed their own automated platforms, the cost of doing so is too great for many local banks that do not have the necessary resources and cannot benefit from the same economies of scale. There are, however, some regional banks that have made the move towards integrated treasury solutions and they have not only benefited themselves, but also their local market.

Recent research conducted on behalf of BNY Mellon (entitled Integrating Treasury Solutions in Asia and Europe – a Roadmap for Success) found that the level of integrated bank offerings differed greatly between the surveyed countries.

According to the survey results, less developed markets, such as India and China, had a low level of bank-offered treasury services integration. In this sense, the banks were found to be trailing behind the local corporates, who were sometimes frustrated by their domestic banks' apparent failure to meet their needs in this respect. As a result, some were turning to the global providers. This is despite 100% of surveyed corporates in both countries agreeing that the knowledge gained from close-relationship banking is critical, and believing that local banks are more committed to local trade.

Quite rightly, if local banks cannot meet their needs they will leave their corporates little alternative but to go elsewhere. Global banks have the power to help corporates' working cash-flow cycles, but this is often at the expense of local banks. There is, however, still great corporate support for local banks that goes way beyond the sentimental. Most corporates believe that local banks are more committed to local trade than global banks. Local banks are also perceived as having a crucial knowledge that cannot always be expressed in a spreadsheet. It is a knowledge many mourn the loss of, especially in today's marketplace. If they could combine their superior local market knowledge with an advanced integrated treasury solution, they could gain a strong competitive position.

Yet this is precisely where many local banks are coming unstuck, which presents a dilemma for both them and their corporate clients. Corporates value their relationship with their local banks, but are increasingly forced to engage with global banks for treasury services. Banks need to keep their corporate clients happy, but cannot implement an integrated treasury platform.

Outsourcing – good or bad?

The seemingly obvious solution for local banks is for them to turn to third-party software providers that have developed products able to marry cash and trade functions and allow both clients and third parties access to the system. Their products are, however, often sold as off-the-shelf solutions that take no account of local market needs and lack end-to-end service element.

Outsourcing to a global commercial bank is also far from ideal. While it gets local banks most of the way in terms of functionality and service, their platforms have typically been built for the needs of multinational corporations. They are, therefore, proprietary systems, meaning the local bank will have to adapt the system rather than the other way around. As a result, the service gained is unlikely to be suited to the needs of the local market in question. Secondly, for the local bank, there is no escaping the inherent competitor risk. In outsourcing its client-facing functions the smaller bank is, in effect, giving its larger peer a backstage pass to access into its local business, thus running the risk of the larger bank poaching its valued customers.

So, if outsourcing is not a feasible option for local banks wanting to offer integrated treasury solutions, they need to explore other avenues.

One solution is a collaborative partnership with a non-competing specialist global provider. This is an evolution of the traditional outsourcing model. The parties are matched as equals so the relationship is mutually beneficial. It builds on the strengths of both the provider and the local bank, while taking into account the needs of the smaller party's client base. Specialist providers thus succeed at gaining business in a region that they might not otherwise penetrate, but unlike outsourcing, local banks are not deprived of customers. In fact, the opposite is true because local banks can provide an easily accessible solution that will bring new business opportunities. The service is tailored to fit with the needs of businesses in the region, enabling corporates to receive a service suited to the region in which they operate.

Offering an integrated solution will also help local banks enhance their client relationships. Over the years, centralisation at all banks has reduced the skill base required for local banks to provide detailed evaluations of local borrowers. An integrated treasury service, complete with full visibility over the end-to-end working capital cycle, provides them with valuable insight into the needs of the region's corporates, helping improve their evaluation skills and repatriate the credit process to a local bank partner. This, in turn, helps them to recover their place in the supply chain.

In addition, an automated system will speed the flow of goods along the supply chain. It allows transaction data to be processed automatically when previously the exchange of the documents involved slowed the process to the point where the supply chain was undermined. One development that has supported such moves has been the launch of SWIFNet's shared infrastructure service, the Trade Services Utility (TSU). The TSU removes the dependence many mid-sized banks previously had on the electronic communications and monitoring platforms of the major banks, both in terms of development and maintenance. Banks with local franchises now have the tools they need to partner with specialist providers, using a platform that has internationally compatible infrastructure and language.

Through combining local knowledge with global technology therefore, the ability to offer integrated treasury solutions presents local banks with an opportunity to defend their place in the supply chain. A common communications platform will elevate local knowledge and experience to a global level, combining the best of local market practices with global technology.

Dominic Broom is managing director and head of Market Development, Treasury Services, EMEA at BNY Mellon.

The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.