This is the first in an occasional series of interviews with senior bankers. Every month we interview a corporate treasurer and we thought it was time that we talked to leading bankers and got their views.
Andrew England
Global Head of Product Management Global Cash Management
In this interview we talk to Andrew England of Deutsche Bank. Deutsche adopted a strategy of becoming a global player in the payment and collection business several years ago and has been making substantial investments in the business. In this interview Andrew talks frankly about the dilemmas Deutsche Bank and others face as the European payments market slowly evolves under various political and economic pressures. He also talks about the new relationship between Deutsche Bank and Barclays.
What is your job?
I am head of the product group at Global Cash Management, a job that I took up when I joined Deutsche six years ago. It is a bit different now to how it was when I first joined. The product management discipline was, I think I can say, not one that was well understood by the bank’s cash management business. We have had to build up the understanding of the role
The latent cash management business has always been here. Deutsche has always had a strong payment capability and been very strong in the payments business. In Germany, for example, we were very strong in Deutsche Mark clearing. We decided it was time to manage cash management as a global business with all the relevant functions. Product management was one of these key functions. We were later than some of the US banks to see it as a business but not too late and we have been building our global cash management franchise over the last few years.
You say you were a little late. Is it too late for anyone else to enter the business?
It is difficult to see anyone new entering the global market. It is just too big a commitment; the technology, the physical network and the people. It costs a lot of money, year on year. The banks that are in the business are known. You could say the fundamental players have emerged. But I would not be surprised to see new regional players emerging. There is still scope for banks in Europe to develop niche regional strategies.
Can we look at how Deutsche has built its global cash management business?
In Europe first of all, we built our European cross-border liquidity capability. This was one of my first tasks. We ensured firstly that our Deutsche Mark payment capability was protected and then that we emerged as a strong euro clearer. We wanted to be global and in the early days this meant focusing on Europe and Asia. But then the Bankers Trust acquisition gave us a footprint in the US and a strong dollar franchise. The next task was to make sure we had the right level of investment in Germany. We wanted to ensure our home market was being looked at and addressed properly. This platform is continuously being enhanced as the base for all our European business. By 2005 we will have completed a very substantial investment phase which has lasted five or six years.
What does this investment mean to the end-user?
Well let me start with the high value payment market. We have built a single platform for the dollar and euro clearing business. This is mainly, but not exclusively, a financial institutions (FI) market. They want similar capabilities regardless whether it is dollars or euros; the same level of automation, the same level of information services, the same investigation capabilities, the same billing and charging mechanisms for all their payments. We can deliver that in the US and near-term in Europe. The platform enables us to standardise our services. There are lots of small pieces of functionality that have to be built around all the processes. All these components add up and mean that we can now deliver client interactivity that is standardised.
For corporates it is much the same, although corporates tend to buy regionally. They are not as global as banks at the moment. But when they become more global and buy in both regions they will behave the same way as FIs. They will find we can offer a simple solution where they need it. A simple capability that is actually very difficult to deliver. But it is not just built around the clients needs. This is also about internal efficiencies. It is about restructuring the business from a cost perspective. How we can be more efficient. Then we can accompany the trend in downward pricing. It is not something we are looking for but if we cannot restructure our cost base we will not be able to deliver to the client at the cost they expect.
What is your attitude to SEPA?
(SEPA, the Single European Payment Area is an EU initiative to create a single domestic market for payments across the eurozone).
My attitude to SEPA is mixed. You cannot argue against the vision of turning Europe into a domestic payment environment. You cannot get away from that as an end objective. But, from the product point of view there are difficulties. It does not help me with the decisions I have to make today. We have to look at the bulk payment infrastructure in Western Europe as it is today. Currently we have bulk payment systems in many countries where we are physically on the ground. Each one of these systems is driven by the country dynamic and reflects the country formats. These systems are often supported by country vendors, local technology companies. The changes that occur are driven at a country level.
So how can one manage Western Europe efficiently as a supplier of services today? We are still faced with regulatory changes in certain countries where I have to commit more money at technology. In some cases technology vendors may be decommissioning software and we have to look at new software and systems. We are obliged to look at new investment in existing bulk payment systems just to stay in the business.
I would like to see a clearer and much faster move to a new payment environment at a European level so I can see what we need to do. It is not happening fast enough. Meanwhile we have to continue squeezing in-country investment out of a global budget which is meant to be used for enhancing regional platforms. It is not the ideal decision but the options are limited.
And there are legislative pressures on pricing?
Yes, there is a prescribed framework over what you can charge. But these legislative pressures do nothing to drive the development of a common payment infrastructure so we can deliver those services at a lower cost. We find ourselves sitting in between. It is almost as if the legislators are forcing cross-subsidisation, using one part of the business to support another. I don’t think that is healthy. It’s a dilemma for banks.
We need to push for faster execution of SEPA. But it is not just about infrastructure, it is also about legislation at a country level. You need to change the local rules that get in the way. For example a local law might oblige companies to hold accounts locally to collect money. But companies want to concentrate and consolidate their accounts. If the local legislation says you must have an account to be able to operate a direct debit, what do you do? You need to change the legislative framework surrounding the business as well.
Do all banks feel like you do?
Most banks recognise that lower infrastructure costs would benefit them. Meanwhile, you are faced with the reality of the cost of supporting local clearing system enhancements. You need to take the cost down and most banks understand this.
If you cannot be in the business yourself you need to find a way to do it. For example, you are quite open about the fact that in a few countries Deutsche uses partner banks. But in many countries you are the partner banks to other banks. In particular, you have announced a rather special arrangement with Barclays. How is this going to work?
This is a new type of relationship which we are seeing develop. The way we look at it is that a bank has to decide when it wants to go to another provider rather than make the investment directly.
We have negotiated with Barclays a structure that positions us as a provider of European services for their corporate customers who will be accessing our network in Western Europe. Their customers will open accounts with Deutsche Bank and make payments and collections. But it will be seamlessly integrated at the front end alongside their existing accounts with Barclays.
From our perspective what we want are the transactions. We want the volume as part of our business model. We see the need to attract and process volumes as a key competency. It enables us to generate transaction volume from a new marketplace without having to make some of the commitments we would have to have made if we had tried to go in directly. Customer documentation and credit remains with Barclays.
It is a win-win for both banks. For Barclays it is not about taking out cost but offering a service they did not have before. The customer still has a legal relationship with Barclays and any liquidity on the accounts is passed back to Barclays.
Other institutions will be following this model as significant interest has resulted from the deal and a number of serious discussions are underway. It is a structure that more and more banks will have to follow if they are going to provide cost-effective services to their clients.
What are the latest trends in the business?
We are seeing more and more interest in MA-CUGs. The typical client is a major multinational with big payment volumes. What we call bank independent clients, the very top end. They are joining several MA-CUGs as they need to join one for each major bank that they use.
Otherwise there is more emphasis from clients around how they want to manage their cash. This is not new but we do see more corporates looking at their liquidity globally, particularly dollar liquidity.
Tell me in 30 seconds why a company should come to Deutsche Bank
For their payment and collection business if they are looking for a global provider we are certainly one of the very best providers out there in terms of: the instrument coverage we have, the geographical coverage and the business model that we have in terms of being able to support them locally. Our platform is globally engineered and has robustness and scale. In terms of customer satisfaction we are consistently rated very highly. Our ability to automate and link to other systems and cope with the complexity of formats has been proven time and time again. We have covered from an investment point of view all major areas of our IT and Operations infrastructure. A corporate will find we are a very strong partner with very few gaps.
