Getting the banking mix right

Published: Jul 2024

Bank relationships are decades in the making, especially when it comes to cash management services. However, treasurers should frequently reassess whether the relationship remains fit for purpose.

Balancing act with time represented by a clock and money, represented by coins

Determining the optimal number of banking relationships and accounts is a conundrum that treasurers are constantly revisiting. It is difficult to find the right equilibrium between efficiency and resiliency, as well as the appropriate mix of capabilities and funding support.

Five or six years ago there was a movement towards reducing the number of banking relationships to perhaps one global bank, but that’s no longer the major trend, says Didier Vandenhaute, Treasury Consulting Partner in charge of Banking and Cash Management at PwC.

“Corporates are looking for the right balance between efficiency and resiliency, as the more concentrated [their pool of banks] gets, the less resilient they become,” he says. “And while financial resiliency comes to mind, especially in light of the US bank failures last year, operational resiliency is equally important, for example if your main collection bank gets hit by a cyber-attack.”

As Vandenhaute indicates, the recent turmoil in the US banking sector made many treasurers rethink their optimal balance. “It’s no longer as simple as looking at whether the bank is present in certain countries or whether it has the services and IT connections required – you also have to layer in the risk factor,” says Sabrina Wong, Treasurer at Veeva Systems, a US cloud-computing company focused on pharmaceutical and life sciences industry applications.

Veeva has kept the same core set of banks, following a rationalisation exercise more than five years ago. It uses two multinational banks, one as its main bank and the other as a backup. “We went through last year’s US bank failures cleanly with uninterrupted banking operations. But not all corporates would have been in the same position and, as such, may have now embarked on a few new relationships,” she says.

Business model and geographical footprint can also make it challenging to shrink the pool of banks. “While rationalisation continues, for many corporates it’s difficult to consolidate down to one banking partner, especially for ones like Pepco, which is based predominantly in Central and Eastern Europe (CEE) and have half of our sales in cash,” explains Alan Chitty, Director of Group Treasury, Tax and Risk at Pepco Group, a large-scale variety discount retailer operating across Europe.

“Perhaps a business-to-business operation can rationalise down to a global bank with [limited] operations in the country, but a business-to-consumer operation like Pepco, with largely cash-based sales, needs to have a network in-country.”

Pepco has selected regional banking partners where the chosen institutions have a major network. “Our broad geographical footprint, from the Baltics to the Balkans, means that there is no single player that covers the whole region,” he adds. “So we have chosen SEB for the Baltics, ING for much of CEE and Raiffeisen Bank International for both Eastern Europe and the Balkans.”

Taking this regional approach delivers better service from a group relationship perspective, better pricing through a group request for proposal (RFP), and also better control in terms of access and user rights, according to Chitty.

Relationship review

It is a good exercise for a corporate to regularly revisit and assess its banking relationships, says Baris Kalay, Head of Corporate Sales for Global Payments Solutions EMEA, Bank of America.

“Today, this is becoming more critical driven by two factors. First, in a high inflationary global environment, how treasurers are controlling costs has become very important. Clearly, running multiple banking relationships and bank accounts in a complex global treasury operation is costly, both in terms of monetary cost as well as the opportunity cost of resource allocation with most treasuries running small teams,” he explains.

The second driver is also linked to the global economic situation. “In the current high interest rate environment, visibility and control over excess cash becomes the top priority of treasurers in every industry. These can be achieved much more easily when you have a limited number of banks, who have the necessary products and technology, such as forecasting, pooling and connectivity,” Kalay says.

There are other event-driven considerations, such as acquisitions and geographical expansion. “If a corporate has acquired a company in another market that hasn’t run bank rationalisation exercises, then the former can suddenly have many more banks to deal with,” he says.

This is a concern for Veeva as it expands internationally. “It is especially important for us to continually rationalise, as we could see more bank accounts and banking relationships than is efficient,” Wong says.

Generally, she likes to keep “a tidy set” of banking relationships. “As a lean treasury team [of three staff], we have to continuously rationalise our banks and bank accounts because we don’t have the bandwidth to maintain a dozen different relationships,” she explains. “Of course, there are countries where we are required to have a local bank account and others where our core set of banks don’t operate, so we will need to have some local accounts as well. But every time we open a bank account, we have to ask ourselves whether it can be consolidated into one of our existing bank relationships,” she explains.

Veeva does an annual “spring-cleaning exercise” looking to see if there is room for consolidation or if the business reason justifies having an extra banking relationship. Additionally, each time it acquires another company, it explores whether it needs to keep the inherited banking relationships. “We typically consolidate them within a year or two,” Wong adds.

While Pepco is not presently acquisitive, it is rapidly expanding with a record number of 668 net new stores in 2023. Historically, however, treasury operations haven’t been controlled by a centralised team; instead the finance manager in a new country would engage a local bank.

“We want the best relationship, so are now using our regional banking partners,” explains Chitty. “When going into a new country, we look at who is present there and hopefully it’s one of our banking partners. If not, then we look at the main banks in-country and see if we can bring them into a group relationship.”

As mentioned, risk-related events have also come to the fore, such as banking partners pulling out of jurisdictions, bank failures, or mergers and acquisitions among banks. From a risk and policy point of view, corporates need to stay abreast of market developments.

“Formally reviewing banking relationships every year is good practice, however not every corporate does that,” says Vandenhaute. “Importantly, they should use a bank scorecard to review the relationship with their banks. The scorecard should evaluate not only the bank’s pricing but also its services and support.”

Share of wallet

According to Vandenhaute, corporates commonly re-evaluate their bank relationships when they come to refinancing. If a bank is not part of the corporate’s core lending group, then it typically doesn’t have the right to pitch for many products and solutions that the company may be looking for.

“At this point, the corporate should evaluate not only its funding needs and who is willing to put money on the table, but whether it is the right group of banks to support its broader treasury needs, including cash management, guarantees and payroll requirements. Importantly, there needs to be a balanced allocation of business to make the banking relationship work,” he says.

According to Chitty, Pepco has a lending group, with a term loan and a revolving credit facility, which is its starting point for the banks that lend to the company. “We’ve tried to be transparent with our lenders as to Pepco’s journey and when we will repay them, which elicits support from them. Obviously, we want to give them a healthy share of wallet, which is predominantly through foreign exchange (FX). Pepco has a big FX programme of over €2.5bn a year.”

The other area that Pepco needs credit for is its US$500m supply chain finance programme. “This is using credits from the same lending banks, which is uncommitted but it generally gives them a good return as well,” he adds.

To Chitty’s point, Vandenhaute argues that corporates should regularly evaluate wallet allocation as part of their banking relationship review, both in terms of the revenue the bank generates from providing its services and the capital these services consume.

“Both metrics are complex to calculate but will allow the corporate to identify the proper balanced relationship, as well as a relationships that may be at risk. For if a bank doesn’t earn enough from its activities to use the capital at risk, for example long-term financing, then it may decide to end the relationship,” he says. “Having a scorecard in place will allow the corporate to have an informed discussion with its banks about constructing a balanced banking relationship.”

Relevant innovation

In cash management, PwC recommends that corporates should go through a formal RFP process with their banks every five years. “This will ensure that the banks remain in line with market practices and market prices. For example, most banks have been slow in passing on interest rate increases. If a corporate puts them through a competitive RFP process, then they can keep them on their toes,” says Vandenhaute.

“Plus, new products and tools are frequently emerging, such as application programming interfaces (APIs), real-time [capability] and new merchant account functionality. Corporates need to continually assess whether they have the right banks, the right service and the right price.”

Interestingly, in PwC’s Global Treasury Survey 2023, 42% of corporates polled indicated that they are considering a bank rationalisation exercise in cash management in the next two years.

Kalay agrees that treasurers need to consider what a bank can offer from an innovation agenda, especially in the transaction banking space. “Alignment with the corporate’s roadmap is important to bring in the innovative, new tools and platforms that the bank can offer, such as cash forecasting tools and seamless connectivity. Efficiency gains are incredibly critical in today’s world,” he says.

As Veeva grows and scales, the most important thing is having IT connections into the company’s enterprise resources planning (ERP) system and being able to push payments out without manually inputting them into the bank’s portal, says Wong.

“Some of the bleeding edge technology might not be fully supported across the different systems, such as ERPs, treasury management systems and banks. There’s a sweet spot of what is robust and reliable,” she adds. “For example, APIs for international wires are not established across all platforms, so can we use them for something as key as payroll? We use old-style Secure File Transfer Protocols because the coverage is more consistent across geographies.”

Chitty is also questioning the use of APIs at this stage. “You need to think about the reason for using them, for effectively they are just another host-to-host connection with slightly faster data flow. We don’t need that information in real time in our business [currently],” he says. “As such, I tend to move towards consolidated interfaces rather than multiple APIs.”

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