With profit margins having been battered by the recent
financial crisis, now is the time for banks to grow revenue and
capture liquidity by delivering enhanced services such as cash
management, according to a new report by global business
consultancy Accenture. Victoria Conroy reports.
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In the post-crisis scramble to shore-up
capital bases, banks worldwide have tried to wring every last penny
out of cost-cutting and operational streamlining measures. These
usually involve swingeing cuts across many business areas.
However, there are existing operational areas
previously overlooked which now offer significant revenue
opportunities. Cash and treasury management may not be the most
exciting areas of a bank’s business, but they have been relatively
unaffected by the recent global economic meltdown – and according
to a new report from global business consultancy Accenture,
Seizing the Cash Management Opportunity, they are quickly
becoming key drivers of revenue growth.
The potential for cash management to come to
the fore is outlined by the report’s author, Jeremy Light, the head
of the European payments practice at Accenture.
“Not only does cash management present
substantial potential for ongoing growth in transactions volumes
and revenues, it also offers opportunities to broaden and deepen
customer relationships, rebuild trust lost in the crisis, and
cross-sell other products and services,” he said.
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By GlobalData
A convergence of
forces
The report explains that the European –
and global – payments industry is being transformed by an
unprecedented array of factors. In combination, these forces are
driving transaction banking in general and cash management in
particular towards increasing consolidation, as banks seek to
harness the steady and profitable revenue streams available from
managing international transactions for customers.
The drivers behind the payments transformation
range from economic to regulatory to commercial. Growth in
international trade and the commoditisation of transactions are
boosting the competitive advantages brought by scale; demand among
businesses – including SMEs – for international cash management is
growing rapidly; regulations such as SEPA and PSD are reducing the
attractiveness of transaction banking for sub-scale players; and,
with new trading corridors and the growth in bargaining power of
high-growth economies, new currencies are rising to prominence,
including Russia’s rouble and the Chinese remnimbi.
The collective impact of these trends have now
been compounded by the global financial crisis, which will have a
profound impact on bank profitability for many years – with
important implications for transaction banking.
The report suggests that the return on equity
(ROE) of a high-performing retail or commercial bank in developed
markets has nosedived since 2007, taking it down from around 26%
three years ago to just 4% in the immediate post-crisis
environment.
However, as well as representing a threat, this
collapse also opens up opportunities for those banks that respond
in the right way.
The report states that the sector leaders will
succeed in lifting their profitability and ROE back into
double-digits (around 15%) through a blend of tactical and
strategic measures.
The bedrock of this rebuilding will be a
strategic approach to cost reduction focused on understanding the
end-to-end costs of the business and determining which elements are
core capabilities that create market differentiation.
While banks need to de-risk their business and
financial operations, they will still need to offer a solid return
to investors in order to attract capital. The report’s analysis
shows that to generate an attractive valuation multiple, as well as
targeting 15% ROE, banks should also be aiming to achieve 15%
earnings growth and 5% productivity improvements.
These requirements mean it is now a strategic
imperative to seek out and seize growth opportunities in
low-capital intensive, stable businesses offering reliable and
predictable fee-based revenue streams throughout economic
cycles.
The cash management
opportunity
Transaction banking and cash management
embody precisely these attributes. By transforming their cash
management operations, banks create a robust platform for future
sustainable value and growth.
Cash management services have often
been regarded as a steady but relatively unexciting aspect of
banks’ activities. In the post-crisis environment such a view is
not just outdated, but dangerously misguided, according to the
report.
The opportunities fall into three main
categories. In terms of new profit pools, the key driver is ongoing
growth in international trade, especially with fast-growing
economies.
Global trade in the past has grown (and shrunk)
at between 2 and 3.4 times the percentage change in GDP – a
multiplier effect which means, by Accenture’s estimates, that
global trade may increase by between 30% and 50% through to 2014,
with Asia likely to account for over 80% of this growth.
North America and the Middle East will make up
most of the remaining growth, with Europe remaining flat or even
negative.
Expansion in trade volumes drives demand both
for international payments and international cash management,
meaning fast-growing markets are the ideal place to expand into and
grow these services.
Other potentially profitable areas include new
liquidity products, new customer segments, and the rising demand
for sophisticated foreign exchange cashflow forecasting.
The second area of opportunity is to focus on
strategic winning concepts to sustain and build revenues, while
optimising operational efficiency and minimising cost.
In mature, low-growth markets, this is likely
to involve increasing market share to realise scale economies.
Other smart concepts include expanding the footprint of transaction
banking to match that of target customers, and analysing customer
segment profitability as the basis for pricing decisions.
There is also scope for rationalising products,
bundling payments with related transaction services to grow supply
chain and open account services, and making more effective use of
technologies such as internet and cloud computing to reduce costs
and drive standardisation and efficiency.
The third area of growth opportunity is ‘white
spaces’ – new and emerging opportunities that are as yet largely
untapped but will be exploited over time.
For example, the financial crisis has
highlighted the fact that banks have effectively been providing
intra-day liquidity credit free of charge to corporate clients.
Working out how to price for this credit
represents a revenue opportunity, as well as enhancing risk
management, especially if banks improve their own liquidity
management.
With new trading currencies such as remnimbi
and rouble set to grow in importance, supporting trade and swaps in
them is a major opportunity. And mobile payments represents a
further high-potential area, in both developed and emerging
markets.
The importance of corporate clients
While financial institutions will
remain a significant revenue source for cash management services,
the report’s view is that the biggest opportunity is among
corporate clients — and increasingly among mid-sized international
companies.
In the wake of the crisis, many corporates are
transforming their treasury and financial operations, to address
inefficiencies and bottlenecks in their cash management and
payments processes.
These transformation programmes are being
triggered by a number of pain points. In many cases, a combination
of multiple banking relationships and high volumes of inter-company
transactions with low use of netting means costs are unacceptably
high.
Transparency and control are frequently
inadequate, including insufficient management of operational and
fraud risks. Usage of available cash is inefficient, in particular
across borders and currencies, and continues to be hampered by
limited planning and visibility. At the same time, reconciliation
and reporting tend to be slow and lacking in automation.
To tackle these issues, growing numbers of
corporates – especially larger multinationals – are implementing
transformations that include the creation of a central ‘payments
factory’.
This consolidates payables and receivables
processing to provide a wide range of valuable benefits, including
reduced operational and transactional cost, improved cash security
and regulatory controls, better and simplified visibility over cash
flows, and enhanced agility and adaptability to change.
This shift towards payment factories means many
larger multinationals can now manage internally many of the
activities formerly handled by banks. As a result, banks may find
stronger opportunities among mid-sized international corporates
that lack the scale to justify creating a fully-fledged payments
factory.
In parallel, corporates are changing the way
they interact with the banking system – focusing more than ever
before on banks’ credit ratings, global footprint, fee levels and
service quality. Each of the changes under way in corporates’ cash
management needs is reflected by specific responses in their
internal processes and banking relationships (see Pain
points: Corporates – cash management needs and responses).
Cash management is also undergoing significant
change at financial institutions (FIs), albeit less dramatic than
at corporates.
To an extent FIs’ pain points are similar,
focusing on high operational, compliance and maintenance costs due
to multiple application and low STP rates, a lack of control and
management information, and a limited flexibility hampering growth,
new business models and product innovation. (see Pain points:
Financial institutions – cash management needs and
responses).
A lack of scale due to regulatory changes
(SEPA, PSD) is also a looming issue for many European banks. To
tackle these issues and meet their own evolving needs, FIs are also
changing the way they interact with their banks.
The five key growth
drivers
While the trends highlighted among
corporate and FI clients are evident worldwide, the degree and type
of competition for payment services vary at both global and
regional levels.
According to the report, differentiation in
this marketplace needs to be determined strategically, by creating
the right combination of five differentiating growth drivers. These
are:
- Volume and scale economies – to maximise
efficiency and minimise cost; - Reach – to provide the footprint that clients
demand; - Local capabilities – to provide effective and
responsive service and problem-solving on the ground when
needed; - Relationships and demonstrable commitment – to
build trust; and - Added value services and high quality of
service – to retain customers and support cross-sell.
These five drivers can be harnessed and
optimised through specific actions around three key value levers:
first, operating model and capabilities; second, markets and
customers; and third, products and services.
In operating model and capabilities, the bank
should look to implement a low-cost operating model for its
transaction, payment and cash management services, meaning a model
that is centralised, standardised, automated, simplified,
interoperable and scaleable.
It should then build on this model to create a
single-platform, high-capacity, multi-currency,
multi-country/language, real-time capability, while simultaneously
developing a differentiated ability to set up new international
branches that reuse this capability, enabling it to match its
clients’ existing or expanding footprints.
In markets and customers, there are three
potential focus areas. The first is to target attractive market
segments, identifying and capturing fast-growing economies and
trading corridors, high-potential trade segments such as
commodities, and selected industry segments such as automotive,
agriculture and pharma.
Mid-sized corporates across industries may be
an especially attractive segment. With many larger multinationals
setting up payment factories, and globalisation continuing,
international corporates that are expanding but still below the top
tier in terms of size are often the readiest buyers of cash
management services.
The second possible focus area is to build up
the corporate business in targeted regions such as Central and
Eastern Europe and the Middle East – a move that will also boost
the reciprocity of correspondent FI business.
The third is to build up the FI customer base,
for example by attracting sub-scale direct participants in clearing
infrastructures, insourcing back office operations, and positioning
the bank as the optimal choice as correspondent bank for other
banks in various regions.
Additionally, large banks could capture more
transactional revenue by partnering with smaller banks to offer an
overlay liquidity structure to corporates.
The smaller banks get access to global
customers, and the larger bank benefits from liquidity
concentration, as well as expanding its footprint and reach.
