Multi-bank solutions, eBAM, SWIFT for Corporates and SEPA Direct Debit: much is happening in the cash management market, with some exciting opportunities for treasurers to optimise efficiency, visibility and control. This month we speak to Alex Caviezel, Managing Director – EMEA Regional Executive Treasury Services, about trends and developments in the cash management market, the evolving needs of corporate clients and J.P. Morgan’s global investments.

What developments have you seen in the cash management market in the last twelve months?

The cash management business remains strong, demonstrating resilient and reliable returns throughout the financial crisis. While there are relatively high barriers to entry, some revenue streams have been impacted by new regulation. And as a consequence, financial institutions are considering their prospects in the cash management market carefully. Certainly, as a truly global provider of cash management services, we find ourselves amongst a small group of banks whose firm-wide policy is to keep investing through the cycle.

The barriers to entry are associated with keeping technology up to date with the demands of today’s regional or global treasury. System interoperability is becoming a requirement as corporates look to banks to help simplify the complex technological environment in which treasury operates.

How are corporate clients’ requirements changing and how is J.P. Morgan responding to this?

Clients are becoming increasingly exacting about what they want and how products should be designed to accommodate their activities, policies and processes. At J.P. Morgan, we have developed a concept called co-invention, whereby we develop products in unison with clients – they are involved throughout the design process, allowing them to outline their future requirements.

We tend to approach clients from different industry segments, including non-bank financial institutions like hedge funds and brokers/dealers. Clients are often willing to share their experiences to help us shape the service proposition. It requires a certain amount of investment on the client’s part as well, but ultimately, they know that the end product will provide the features and functionality that they require.

Clients are now looking at multi-bank solutions which act as a practical alternative to the abundance of proprietary channels that are now widely available. As factors such as the internet accelerate corporate expansion, J.P. Morgan has invested heavily in new global platforms and a client service model which, combined, enable a consistent client experience and service excellence, worldwide.

Service is undoubtedly a key selection criterion for corporates in search of a global cash management provider and something J.P. Morgan is well regarded for.

How has J.P. Morgan singled itself out through its investments throughout the financial downturn and what are the benefits of these investments for corporate treasurers?

First of all I would highlight our geographic expansion, which will allow us to serve clients in those territories where they are currently active or are planning to expand into. In EMEA, countries such as Russia, Saudi Arabia and the whole of sub-Saharan Africa are becoming increasingly important within the operating model of our clients.

We are building out more integrated local capabilities at a time when we know that some of our competitors are actively retreating from some of these countries.

Other global initiatives worth mentioning are:

• A new accounting platform, that has helped us improve the global client experience with regards to reporting, billing, and account postings. This powerful, single platform also gives us greater agility to bring product developments and modifications to market quickly.
• A new payment platform providing a single, very robust foundation for all our low-value or ACH payments, including our entire SEPA service proposition.
• A new liquidity platform, supporting the firm’s entire liquidity management product portfolio. We have introduced a new user interface, which enhances the treasurer’s visibility and control over their own liquidity structures.

All of this is aimed at those fundamental concerns that treasurers have around visibility of cash and control over risk. They want to know which counterparties they’re exposed to, and understand the nature of the risks involved. Is the process of aggregating, administering and investing funds efficient? Are they able to apply risk management controls globally? These are the concerns that our new solutions will address.

The world of banking seems awash with regulation and new market initiatives – which of these initiatives are of interest to corporate treasurers?

We could have a very lengthy debate about this but there are several regulations out there specifically targeting banks, which will surely have an indirect impact on corporates. For example, the new liquidity regime, Basel III, the Payment Services Directive (PSD): these are already in place, or in the pipeline.

Inevitably, whether we like it or not, implementing many of these regulations will result in an increase in capital requirements. Therefore there will be a cost to financial institutions, which will trickle down to the users of cash management services.

Of course we are all going to try our hardest to manage these new costs but this will need to be funded. Some banks are already suffering from reduced payment revenues due to the PSD, and one would expect banks to make up this shortfall somewhere else. Reduced income streams in a high-investment environment will prompt financial institutions to ask whether cash management should really be one of their core activities.

There are also new regulations coming into force in 2010 which will ensure that all Eurozone banks are able to process core SEPA Direct Debits. This will make the SEPA Direct Debit effective for automated and standardised collections in 16 European countries, whichever the counterparty banks.

Meanwhile, at an industry level we will continue to support the adoption of common standards for eBAM and the continued migration from paper payments instruments to electronic, and we will continue to work with SWIFT to achieve this.

What trends have you identified in corporate cash and liquidity management over the last twelve months?

There are a number of trends I would like to highlight:

• We’re seeing greater interest in the control of investment counterparty risk. This is the foundation of one of our money market investment products, which give clients more control over counterparty selection, and yet automates the execution to optimise efficiency.
• Clients are pushing for solutions which offer greater interoperability as more and more technology permeates treasury. Our host to host channel offering is able to adapt to a corporate’s file format preferences, minimising re-calibration efforts client-side. Statement and payment reconfiguration is part of what we consider to be our value-add, not something that clients should really have to concern themselves with.
• SWIFT for corporates demonstrates how corporates are pushing for bank-agnostic channels, and we’re pleased to see SWIFT making its services more widely available. We’re aware that the proliferation of proprietary services makes cash management more complex, which is why we develop multi-bank capability for our channels.
• Corporates are feeling a little uncomfortable about the prospect of further market consolidation, from a concentration risk viewpoint at least. And so they are considering how to spread their cash management activities more broadly across more counterparties. I think we benefit from that, given our relative strength in the market. Clients are really focusing on which banks have core competency in this area, and which ones are developing their core competencies.
• Treasurers are becoming more involved in areas which have traditionally been covered exclusively by procurement, such as corporate card and supplier finance programmes and also working capital initiatives. Today, as treasurers and chief financial officers are looking into the efficient cash utilisation, working capital management practices have become a specialised discipline.
• Centralisation of treasury remains an ongoing theme, with the largest and most geographically dispersed corporates now looking to optimise levels of visibility, control and cash management efficiency at group level.
• Market failures have driven corporates to seek greater control over counterparty risk and so we’ve seen heightened interest in the control of FX settlement risk. Interest in CLS is evident, not only from financial institutions, but also from larger corporates.

What developments do you expect to see in the cash management market in the next twelve months?

I think smaller suppliers will be granted the opportunity to leverage the credit power of large buyers to achieve more favourable terms than they would otherwise achieve by going direct through their main bank. This is all about supply chain finance, where suppliers to large buyers are able to leverage new financing products, enabling them to monetise receivables earlier.

With regards to high volume collections, which is traditionally a challenging task, we’re recommending that clients leverage the SEPA Direct Debit. This standardised, cost-effective solution helps clients launch into new markets with speed and agility. This, coupled with online reconciliation tools such as Receivables Edge (which we continue to develop for the global market), makes a really compelling proposition around collections.

I expect continued growth amongst the BRIC countries, but the operating environments in those territories present treasury with challenges. One such challenge is how to leverage locally domiciled balances where repatriation of funds is not possible. We have developed interest optimisation solutions in Asia for liquidity managers seeking to optimise the value of balances across the region.

Interoperability is a key watchword for us at J.P. Morgan as we are determined to simplify the corporate treasurer’s interaction with bank infrastructure, and multi-bank services are an example of this.

We have already talked about eBAM – the elimination of manual processes behind bank account management. We expect to begin our pilot later this year and I am quite sure that eBAM’s ability to streamline manual processes will help solutions of this type to gain momentum rapidly.

Corporates have started to question whether they should build in-house, or buy in, dedicated treasury management systems, which can involve long and complex implementations. What we’re seeing now is corporate treasurers considering whether some of the increasingly sophisticated bank systems, like J.P. Morgan’s, will meet their requirements more simply.