This month we talk to Jasper Savelkoel of KBC about KBC’s strategy in the corporate banking and cash management arena and the current trends affecting the banking industry.

What can you tell us about KBC’s corporate banking strategy?

KBC Group is what we call a multi-local independent bancassurance group, ie a bank which offers insurance as well as banking products. We hold leading positions in the Central European banking markets as well as in our home market of Belgium, and we also offer full service branch networks in many Western European countries, South East Asia and the US.

KBC Group has approximately 60,000 employees, while our customer figures around the world amount to around 13 million. These are not only corporate customers, but also private customers, as well as many small and medium-sized enterprises. We operate with a multi-brand strategy, so in each of our different locations we may appear under different brands: KBC Bank in Western Europe, Serbia, US and Asia Pacific, K&H Bank in Hungary, CSOB in the Czech Republic, Kredytbank in Poland, EIBank in Bulgaria and Absolut Banka in Russia.

As a bancassurance company, we are able to offer not only banking products but insurance products too. Looking at the corporate activities, we provide a full range of products and services to domestic and international companies within and across our geographical markets.

Furthermore, the commitment we have shown to banking in Central Europe can be seen in the €7 billion we have so far invested to achieve a prominent position in this emerging market, as well as the significant investments we are planning in the coming years to expand our presence in the region.

How exactly are you looking to expand?

There are actually two ways in which we seek expansion. Firstly, by growing the market share of the countries where we already have a leading presence – such as the Czech Republic, Poland, Slovakia and Hungary. The second strategy, which we recently followed, was what we like to call a ‘next round’ in Central and Eastern Europe, having last year acquired Russia’s Absolut Bank, EIBank in Bulgaria and Serbia’s A Banka, which has been rebranded as KBC Serbia.

What are the key trends you are seeing in the market?

I would say that one of the trends we are seeing today is that there is an increasing level of pan-European competition between banks. I believe that this is partly due to the fact that SEPA is gaining momentum – not so much in terms of its market acceptance, but more in terms of the market preparing itself strategically. As such, this is leading to pressures on transaction fees within the liquidity management services.

We see a lot of global banks coming downwards to local markets and we see some efforts from domestic banks pushing up their activities to adjacent markets, so there’s a lot of movement. KBC’s position is quite interesting and presents us with a lot of opportunities. By being multi-local, we are close to our corporate customers while at the same time offering them global reach. I think we have a unique position and an interesting proposition for our customers.

The liquidity crisis at the moment presents an opportunity for our liquidity management services. The centralisation of cash is becoming a standard for operational excellence in liquidity management. Corporate customers are increasingly asking for regional or even pan-European liquidity management solutions. As a result, liquidity management products have become a main anchor in the bank-to-corporate relationship. From our perspective, and also from a corporate perspective, I believe this is a good thing, as having a strong relationship and liquidity management solutions in place typically increases the duration of the commercial relationship.

What sort of impact do you think this crisis is having on your corporate clients?

Well, that’s the hard part. For one thing, they will pay considerably more for their funding. At the same time, more and more banks pitch the concept of relationship lending instead of transaction lending towards their corporate clients.

How would you differentiate between these?

During times of high liquidity, there is a trend for companies of all risk profiles to have easy access to new money, refinancing their existing obligations, etc. But that is no longer the case in this type of market. As long as the bank has a long-standing and established relationship with the corporate customer, it is probably true that it will continue to finance the corporate needs. But I would say that the true transactional lending has diminished now. In short, banks will require a relationship to lend, so it is key to corporates to invest in their bank relationships.

My personal opinion is that we are not at the end of the liquidity crisis yet, so this aspect will continue to impact the market for a considerable period.

What are your views on SEPA today?

An end date for non-SEPA domestic payment products really would be helpful to enforce market acceptance of SEPA and SEPA instruments. Personally, I would like to see a date established sometime around 2011-2012, but the sooner the better. That way, transition between the old legacy domestic instruments and the new SEPA ones could be as short as possible – something which is in the interests of both corporate customers and banks alike.

However, what I still see today is a lack of readiness and awareness towards the opportunities SEPA could offer. If you talk to corporate treasurers, they don’t seem to know what they should do, or even if they should do anything at all.

In addition, market acceptance of the SEPA Direct Debit (SDD) scheme seems to be endangered. This will remain for as long as the Payments Service Directive implementation and national transpositions remain unsure, and the bank-to-bank schemes and electronic mandates for the SDD are under heavy debate. The SDD is a major building block of the realisation of SEPA, but as long as it is not clear, there will still be a long way to go.

Meanwhile, take-up of the SEPA Credit Transfer (SCT) instrument is very slow, with our statistics indicating that only 1.5% of all credit transfers processed by KBC are SCTs. This is still higher than the take-up in the market overall, which is around 0.5%.

That’s very low.

This is the reality. Another observation is the fact that as delivery of XML ISO 20022 standards is on track, at the same time we will start seeing national opt-outs, meaning that the risk of a ‘mini-SEPA’ will become evident. The risk is that we might have one single payment instrument, which remains subject to various inputs instead of one standardised input – the opposite of SEPA’s ambition.

What do you see as the longer term prospects?

Well, the longer term prospect is that corporate customers who decrease their number of accounts will probably decrease their number of banking relationships too, or alternatively centralise all the cash they hold during the day throughout their international operations into a few accounts end of day. But it won’t happen all at once. Companies are likely to first centralise their account payables by means of payment factories. In a second stage accounts receivable will follow.

The reason for this is that a lot of EU payment instruments will remain outside the scope of SEPA. Cheques and cash remain considerable parts of the payment industry in Europe and are likely to remain so. In addition, the XML-based bank-to-customer reporting is still not in place and is an important means for companies to reconcile their pan-European payment transactions, plus the SDD is delayed until November 2009 at the earliest. As a consequence, we will probably have a period of both SEPA and domestic formats persisting until 2015, and a market where banks will aggressively cross-sell their payment products.

A substantial number of small and midcap corporates will try to establish straight through processing (STP) and reconciliation of payments in connection to their ERP systems. This is also still in the beginning of development, because companies have to adjust their ERP systems in order to make sure that they can process SEPA instruments on the basis of new XML standards. So the corporate reality today is that there is still a lot of manual processing of transactions and subsequent reconciliations within the corporate book-keeping system.

What we also think is that companies will request banks not only to manage their cash in, let’s say, the SEPA market, but also in the more emerging markets, for example, going further eastwards in Europe where we experience increasing demand for basic cash management solutions.

Moving on from SEPA, what would you say is KBC’s competitive advantage in a harmonised European payment market?

To start with, I would like to say we have identified three important drivers:

• The first is that in the future large uniform European payment market, corporate customers will need banks to be near to them. At the same time, they want their banks to help them increase STP rates for bank transactions and reporting as much as possible. Our strategy is to offer and develop standardised products across all our banks, like web-based e-banking and e-reporting, to facilitate the STP needs of our international corporate customers, at the same time ensuring that we are near to them, thereby maintaining a strong & open, operational and strategic relationship.
• On the other hand, the high cost of ownership will force customers to optimise (ie most likely decrease) the number of banking relationships per geographical region.
• Finally, we believe that long-term relationship lending is key to both banks and corporate customers, and we are offering that to our clients. Cash management products are instrumental here as they typically increase the duration of commercial relationships by more than 25%.

In terms of what KBC is offering to facilitate these three things, we apply a customer relationship model that, to my belief, is truly customer centric and delivers on commitment. For example, if a corporate customer wants to open an account with any branch of KBC Bank throughout Europe and have remote access to it, we can do this in two weeks and in a standardised, uniform way. This is the bread and butter of liquidity management products, because if you cannot open up an account and install all necessary electronic banking and one-on-one services, you cannot start banking with the corporate customer.

We have also applied a single pricing model across all countries. This really helps to service customers as we like to bank with them in a number of countries. In addition, as a founding member of IBOS (the International Banking One Solution organisation) – in countries where we have insufficient coverage – we can team up with one of the 12 major local banks involved, offering the full range of cash management products, from remote account opening to zero-balancing cash pooling solutions.

We attach much value to local market know-how. Central European markets sometimes differ completely in terms of payment instruments and different payment behaviour. That’s why KBC Group works to have a strong local presence – with around 75 corporate branches in our European home markets. That‘s what our customers appreciate – a one-stop shop for all your needs.

We really focus on this by having one single electronic banking system called w1se Corporate E-banking – a multi-bank, multi-format application which enables customers to manage their accounts, transactions and reporting across KBC as well as other banks. No need for any other e-banking application. And it’s important because market studies show that maintaining several e-banking applications is a costly corporate expense. So, they have an incentive to decrease the number of those applications. KBC is also one of the first banks worldwide to offer full SCORE compliant MA-CUG – SWIFT for Corporates solutions.

Are you seeing much take-up of this w1se corporate e-banking tool?

Definitely, especially for the international companies that require services in multiple countries. As it is web-based, irrespective of where you are within your treasury organisation, it acts as a ‘one application fits all’ in terms of geography, transactions and reporting. In fact, KBC Group hosts all of its electronic banking tools to manage corporate customer’s day-to-day treasury and trade finance operations in its single portal at www.kbcmerchantbanking.com. We feel that this experience, together with a customer-centric, relationship banking model that delivers in daily life, is the real reason why companies select us.