In the Prologis treasury department, Hoestra and his team were facing their own challenges. This was mainly due to the company having over 1,000 legal entities in 14 countries – all of which had one or two bank accounts, depending on the currencies used. Moreover, the legal structure of the company is not static and bank accounts are frequently opened and closed.
“Aside from having a vast number of accounts, there were lots of nuanced historical exceptions that had developed in our banking arrangements over time,” Hoestra explains. “Switching banks would not be a simple job and we needed to do this as quickly and seamlessly as possible, while maintaining business-as-usual processes for the organisation.”
Identifying the opportunities
While the situation presented considerable challenges, treasurers often thrive on turning challenges into opportunities. This was certainly the case at Prologis.
“While this unexpected change created significant challenges for treasury, it also presented a tremendous opportunity to re-examine the company’s banking relationships and think about what we would like this to look like in the future,” says Hoestra. “We quickly began to outline a banking strategy that would help drive greater treasury efficiency.”
The view that this was an opportunity more than a challenge was also adopted at Informa. “Our banking arrangements were quite fragmented, with numerous local cash management structures in place across Europe; it worked but it wasn’t ideal,” says Edwards. She explains that Informa had two options: either to shift accounts to another bank, or to review the existing banking arrangements and build a regional banking strategy that better matched the company’s needs.
The treasury decided on the latter approach and leveraged awareness of the bank’s decision across the company to build support for the project. As Edwards explains: “The public nature of the RBS withdrawal meant that we were able to obtain buy-in for our project because people understood the urgency of the situation. If we were to launch such a big project under any other circumstances I am not sure how easy it would have been to get the same level of support.”
Issuing an RFP
With a plan in place not only to switch banks but also to drive numerous process efficiencies, it was time for the hard work to begin. For both organisations, this included mapping out their current banking arrangements, deciding what was required from their new partners and reviewing a host of other factors such as banks fees.
A request for proposal (RFP) then had to be drafted outlining these requirements by both organisations (see the Back to Basics article for more detail on how to draft an RFP). This was then sent out to a shortlist of banks.
“Five of the seven banks that were issued an RFP could meet our requirements,” says Hoestra. “After scoring their responses, we could not decide between them. We therefore decided that the best way to proceed would be to meet them all in person.” Rather than having the banks visit the Prologis office, Hoestra and his team visited them in order to “get a feel for the bank, rather than simply be pitched to.” Following this process, the banks were scored again and, after some negotiation around pricing, a final selection was made.
A similar process took place at Informa. “Given that we wanted to do more than simply lift and shift banks, we constructed a new RFP that incorporated all the elements of the efficient structure that we wanted to build and issued that to the banks,” says Edwards, adding that the subsequent decision was quite straightforward based on the responses received.
Perhaps unsurprisingly, counterparty risk was a significant factor in the final decision for both companies.
“We wanted to use a bank whom we did not have a cash management relationship with in the US to ensure that we have a diverse banking arrangement,” notes Hoestra. “It was therefore decided that Deutsche Bank and J.P. Morgan would win a 50/50 share our European business given the product suite, footprint and commitment to the market of both banks.”
ING would also hold management accounts in all the countries in which Prologis operates. “A large part of the thinking behind this structure was to enable us to have flexibility,” explains Hoestra. “In today’s banking landscape nothing is certain, so while we hope that our new banks will remain committed to the market, if they do decide to pull out we would be able to switch fairly effortlessly to another bank.”
Informa, while opting for a less complex banking structure, also put counterparty risk at the centre of its decision making process. “We chose BNP Paribas as our core regional cash management bank,” says Edwards. “They best matched our geographical footprint and because Europe is their home market we don’t believe that they will retrench. The other bank in contention was American and we couldn’t be as sure about their future plans. And even if the worst did happen, we have found with the RBS experience that we have sufficient time to move. There was no need to reduce efficacy by using more than one banking provider.”
It is worth noting that Informa’s decision was made independently of the much publicised referral agreement between RBS and BNP Paribas. The arrangement was put in place to provide support to those RBS customer seeking a new bank and was reported to create streamlined migration process. However, Edwards reports that this was not her experience. “There was no difference using the process outlined by the referral agreement, nothing was directly handed over,” she says. “The only impact I saw this having was that it made BNP Paribas very busy as they were dealing with lots of implementations at once.”
Taking the time
At the time of writing Informa is in the middle of its migration – a process that Edwards says has not been as quick as she would have liked due to numerous factors, including needing to provide a host of new KYC information. “As well as this, we are also having to make sure that all of our customers are aware of the change,” she says. “This process can be quite slow and it is just a case of continuous education.”
Prologis, meanwhile, has completed its migration, but this also took longer than was first anticipated. “We made the move ahead of the market, but there are always unanticipated delays due to KYC and so forth,” Hoestra explains. “My advice to anybody in a similar position would be to make sure that you give yourself enough time to account for these delays without creating any unnecessary risk.”
Edwards likewise advises that extra time should be taken throughout the process. “Make sure that you know how busy the bank you are switching to is and then take a step back and extend your timelines accordingly,” she says. “Also, it would be prudent to talk to peers going through a similar process to hear about their experiences of switching to the banks that you are considering. This can help to build a clear picture of what to expect.”
Looking to the future
Given the pressures on the banking industry at present it would be optimistic to assume that others will not follow the move taken by RBS to withdraw from transaction banking outside of its core markets at some stage. It will therefore be vital for corporate treasurers to keep abreast of what is happening in the banking industry to ensure they are not caught off guard.
Treasurers may wish to maintain constant dialogue with key banking counterparties to get a better idea of their long-term strategies. Treasurers should also be honest and open around their own strategy to ensure that their bankers fully understand what is expected of them and to ensure they can continue to support their operations moving forward.
In the short term treasurers should also expect banks to become increasingly unwilling to accept non-operating deposits and to lower the rate of return. Planning for such changes should now be something that all corporate treasury departments have in place.
To do this Bob Stark, VP of Strategy at Kyriba advises that treasurers be proactive in their approach and begin by understanding their cash balances. “Separating cash balances into operating and non-operating tranches is a must,” he says. Following this, he advises that treasurers speak to banks to understand what is important to them. “Banks care about two time periods: 30 days (for the liquidity coverage ratio requirements) and one year (for the net stable funding ratio). Corporates need to think of these timeframes when planning how to manage their cash,” he adds.
A prudent next step is to improve cash flow forecasting. “The old excuse that I’m cash rich so I don’t need to forecast goes out the window,” notes Stark. “If you are cash rich then you have excess non-operational cash and the banks banks value it differently than before, so it is important to know how much cash you will have on the books at any particular point in time.”
The final step is to consider other investment options. “Money market funds, tri-party repos, separately managed accounts all generally stay within existing investment policies,” says Stark. “In addition, some treasurers will look at more creative options such as collaborating with A/P and procurement to take advantage of higher yielding supplier discounts.”
Whether it is a bank withdrawing from transaction banking, reducing its presence in certain geographies, or simply being unwilling to accept non-operating cash deposits, it is clear that these are challenging times for the corporate treasury. Indeed, when speaking about banking relationships the questions that were typically hypothetical and prefixed with “what if” have now become real issues that have to be dealt with today.