Bank account rationalisation is regarded as an increasingly vital element of best practice in corporate housekeeping, with potential to not only dramatically improve cash management and visibility but also cut exposure to fraud. So how can treasurers go about putting it into action and what kind of benefits might accrue from its successful execution?
It has been an eventful year for globally active corporates, with geopolitical tensions, a palpable souring of the economic outlook and trade and tariff wars causing decision-making in areas such as mergers and acquisitions and investment to be challenging. As ever in such environments, due diligence demands corporates re-evaluate partnerships, review structures, leverage internal investments to the maximum and look for ways of improving their working capital.
As they look to enhance their financial efficiency in uncertain times, corporates nowadays, in line with best practice, will consider rationalising their bank accounts. Bank accounts are necessary of course for businesses to operate in multiple territories. However, it is now widely recognised that most businesses probably do not need as many bank accounts as they have. Indeed, as organisations grow and expand into new markets around the world, for instance through M&A or greenfield investments, bank accounts are often opened up simply as a matter of immediate convenience.
As a result, companies can end up owning hundreds, if not thousands, of bank accounts around the world. And that can be expensive: it can impact the treasury department’s ability to have visibility and effectively manage the group’s cash. It can also expose the organisation to an increased risk of fraud.
The task for treasurers, then, especially in fast evolving, challenging environments that force corporate strategy rethinks, is to keep an eye out for proliferating bank accounts, certain in the knowledge that by streamlining them they can optimise a range of operations including the accounts payable and accounts receivable processes; the strategic management of cash (which helps to release trapped cash); and the need for short-term borrowings.
Pieter Sermeus, Manager at treasury consultant Zanders says that historically a globally active corporate might have had just a few or even one single ‘house bank’ that would take care of all its regional and/or global banking requirements. Nowadays, certainly since the financial crisis, this “one world, one bank” is no longer acceptable, not least from a counterparty risk and diversification point of view. After all, it rarely makes sense to have “all your eggs in one basket” with a sole supplier of goods or services anyway.
While being exposed to one bank goes too far, then, it is riskier to have hundreds of banks spread across the globe than it is to concentrate business with a chosen few, especially if you have limited visibility over the funds in those far-flung bank accounts. Rationalising banking relationships based on the business’ footprint, operational needs and geography is therefore key. Allied to this task is the need to spread risk so the organisation’s banking footprint takes advantage of the best banks or banking services in each region or country it operates in.
Given the need for corporates to engage with fewer banks — whether it be for technical or pragmatic reasons – how should they go about determining exactly how to streamline their banking relationships? Sermeus suggests using wallet distribution, a frequently used methodology for evaluating multiple banking partners. In this methodology, the amount of corporate banking business assigned to a banking partner (measured in both direct and indirect banking fees) is compared against the provided credit commitment of that banking partner. This allows corporates to evaluate if each banking partner’s reward is in balance with the commitments and to compare the relative performance of different banking partners.
Sermeus says: “The wallet distribution methodology can provide a corporate with valuable insight into the revenue expectations of its banking partners and bring objective arguments to the table during discussions. It is however important not to limit the discussion to this ‘revenue versus credit commitment’ trade-off. A banking partner can underperform in terms of wallet distribution, but can provide complementary value-adding services or have a high level of overall satisfaction. Overall, corporates should make sure their banking partners understand where they fit into the general treasury strategy.”
By working through the wallet distribution methodology, a corporate eventually ends up building mutually beneficial relationships with its core banking partners who are committed for the long term and rewarded accordingly. At the same time though, Sermeus says, corporates should remain “bank-agnostic” to maintain flexibility in case there is a need for a change in banking partner going forwards.
“Many corporates have implemented bank-independent connectivity via SWIFT which improves the visibility compared to multiple, proprietary bank interfaces. Remaining bank-agnostic means a change in banking partner can be implemented more quickly, and more importantly can also be a catalyst to harmonise internal banking processes. For instance, the use of a central payment platform can allow standardised payment processes and further efficiencies.”
The promise of open banking
Recently banks have also been offering virtual account solutions. Sermeus explains that these multiple virtual accounts are linked to one ‘real’ bank account, which in turn helps to reduce the number of external bank accounts held: “A corporate can have one real bank account per currency with an unlimited number of virtual accounts linked to them, significantly reducing the complexity of its banking landscape and facilitating the centralisation of receipts and accounts receivables reconciliation processes. Since cash is concentrated on a limited number of bank accounts, this will also have a positive impact on cash and liquidity management.”
A corporate’s banking landscape will also be impacted by changes in the regulatory environment. Sermeus highlights in particular the EU’s Payment Service Directive 2 (PSD2) or its allied Open Banking initiative in the UK, both of which came into force in January 2018, as having the potential to significantly impact treasury operations by providing a greater choice of providers and solutions.
The initiatives oblige banks to provide access, with consent of the corporate, for third parties to extract statement information and initiate payments. Sermeus says this will create a stimulus for the offering of bank agnostic applications which can consolidate the information of all bank accounts via the use of application programming interfaces (APIs) – the digital plumbing that enables applications to talk to each other. “Potentially open banking and PSD2 will enable new entrants to offer innovative, value-adding services which challenge the traditional bank services,” he says.
In the UK, one area where finance departments will likely see an early benefit, thanks to open banking, is aggregated account visibility. The likes of HSBC and Barclays have begun to enable UK customers to view their account balances from multiple banking providers through their online banking platform. Whilst these solutions are for now aimed mainly at retail customers, hopes are high that open banking will lead to much more efficient multi-banking for SMEs and middle market corporates as well. Currently, only corporates on SWIFT can benefit from efficient multi-banking but open banking and the use of APIs will bring the price of this down, meaning that smaller companies will be able to see up-to-date balances across their accounts in real-time and manage these through just one portal.
More specifically, there is an expectation that open banking solution providers including the fintechs will offer sweeping, liquidity management, forecasting and other value-add applications at a low price point to middle market corporates and SMEs. Corporates today may receive details about their account balances at set times through SWIFT MT940 messages but in an open banking, API-enabled world, there would be no need to wait: corporates would be able to access up-to-date balance information via their TMS, ERP or online banking portal in near real-time. In this way, batch to near real-time processing will become far more ubiquitous and accessible to firms of all sizes.
Horses for courses
Over at debt and treasury advisory specialist Redbridge Analytics, Dan Gill, Senior Director, says there is not a one-size-fits-all approach to rationalising bank accounts. The number, location, type and funding structure of bank accounts can vary widely across companies, even companies that are in the same industry and regions, he says.
Gill says there are “myriad strategies” for rationalising a bank account structure, with rationalising the expense of maintaining those accounts a major common objective: “Every bank account that a company maintains represents a cost. Often, those costs can be greatly reduced by eliminating accounts and not only rationalising the existence of each account, but also rationalising the services that are being used.”
While a significant reduction in the number of accounts will certainly reduce the fees associated with cash management operations, Redbridge’s experience has realised even greater savings by rationalising the types of services used within accounts to effectively manage cash.
In order to perform a service rationalisation on cash management accounts, visibility into the true costs of managing our accounts and performing cash management transactions needs to be established. To achieve that visibility requires accessibility to the bank fees being charged against those accounts: “One of the reasons that visibility into bank accounts and their costs is so difficult is that many banks have simply not reported the details of the charges levied. This has led to significant expenses to the treasury bottom line with no way to validate the accuracy.”
Fortunately, the global banking industry has developed a solution that allows any bank in any part of the world to accurately report the monthly accrual of bank service usage and charges. The ISO 20022 file format known as the Bank Service Billing (BSB) standard can be used by any bank, anywhere in the world to report the monthly aggregated balances, service usage, pricing and charges for any account to any client.
Gill adds: “Through the use of the BSB or other industry standard reporting formats, banks are able to help their clients close gaps in both the rationalisation of the cash management services they are using as well as maintaining control over their entire inventory of accounts by automatically identifying new accounts opened. It is the automated visibility into accounts that the BSB file gives us that can help solve the account rationalisation problem once and for all.
“By monitoring the whole inventory of accounts in real-time, we can eliminate the sporadic need for a review project every year or two. Even in the most decentralised treasury operation, the near global availability of the BSB file format offers us the opportunity to rethink the entire need for account rationalisation. Automated BSB review gives us visibility into the cost, the usefulness and the rationale for every account in our inventory and they are now available from banks in many countries around the globe.”
Bringing order to accounts
US-based international children’s charity World Vision International – a winner in Treasury Today’s Adam Smith Awards 2017, is one organisation that has benefitted greatly from having rationalised its bank accounts. The non-profit organisation has a presence in 100 countries and last year its expenses on its global programmes totalled US$2.27bn on income of US$2.76bn.
Peter Dong, World Vision International’s (WVI) global cash manager says the charity’s expansion over the years had left it with over 2,000 bank accounts with over 200 banking partners. “The situation arose out of convenience and necessity, without much thought given to an overall cash management strategy. It was untenable, however, as it posed a potential material risk to the organisation in the form of fraud, liquidity, inefficiencies, controls and cost,” he says.
To address this problem, WVI’s treasury team started a bank account rationalisation project. It also aimed to consolidate its banking partners by creating a smaller group of global banks whose footprint better matched that of the organisation.
“Recognising that these changes would be disruptive to our finance operations, we developed an approach that addressed change management with emphasis on collaboration and communications amongst all impacted offices, the global partner banks and global treasury,” says Dong.
Initially, each of WVI’s global partner banks visited its local offices to see how each was using banking services and learn about the challenges the charity faced in managing its finances. “That was our ‘due diligence’ process and through it we learned that most of our bank accounts simply existed to access cash to fund operations and pay vendors. Consolidating these proved an opportunity to create greater efficiencies and safety to staff,” he says.
Following the due diligence process, WVI’s partner banks crafted cash management solutions customised to each WVI office with guidance and broad objectives provided by WVI Global Treasury.
Dong’s colleague at WVI, Kimberly Floyd, Associate, Global Treasury says: “The new solutions consolidated all bank accounts in each country to one partner bank and maintained only those bank accounts deemed operationally necessary. Where applicable, the new cash management solutions provided more efficient payment methods such as electronic, mobile, and prepaid cards in lieu of cash and cheques.
“The new solutions also included centralising all payments to one office and eliminating the need for separate accounts payable at each project location. The result: WVI is saving money by making our banking processes more efficient and manageable.”
Another important step in the rationalisation project was the use of “a three-stage iterative approach” in forming the best cash management solution and account structure, with the banks providing the new solution to WVI’s global treasury team, its regional finance directors, and finally its national finance directors. “This process allowed the solution to be vetted multiple times to meet project objectives and operational requirements and include all stakeholders in the process,” says Floyd. “By including as many parties in the decision-making process as possible, our bank rationalisation solution became a team effort rather than a top-down management approach.
“Rationalising banking partners and bank accounts is a time-intensive project. In hindsight the benefits far outweigh the time and energy cost. Efficiency, security for employees, visibility, transparency, cost savings, and improved account management are just some of WVI’s successes realised through our bank rationalisation project.”
