Canada’s banks have enjoyed relative strength and
stability compared to their larger US neighbours and have dominated
the cash management arena. But with the entrance of foreign
competitors, they need to adapt and evolve or be left behind, as
Victoria Conroy reports.
Cash management is one of
the most stable operational areas for banks operating in the
corporate space, and when combined with one of the strongest
banking industries in the world, it means lucrative revenue
streams, particularly amid the upheaval faced by banks over the
last two years. But complacency is dangerous and can mean a
damaging loss of market share if the dominant players do not adapt
to changing market needs.
A new report from US payment
consultancy Aite Group, Trends in Canadian Cash
Management, shines the spotlight on how Canadian banks have
dominated the domestic cash management arena – and how the growing
pressure on them to enhance their service offerings, brought about
by the entrance of major foreign players, means they must adapt or
Large Canadian banks currently
generate approximately 90% of Canadian cash management revenues,
but while the large Canadian banks have long enjoyed a domestic
marketplace with limited competitors, in recent years, regulatory
barriers to foreign entry have become more relaxed, allowing
foreign entrants to bring their global capabilities to the
attention of large multinational corporates – capabilities that
some Canadian players can not provide.
One lesson many foreign banks have
learned is that it is far more difficult to grow a presence in
Canada on the retail banking side than on the commercial side. As a
result, most recent efforts have been on the commercial side of the
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Canadian banks currently have the
capabilities to meet the international banking needs of most
customers, which include foreign currency accounts, foreign
exchange and international payments.
But the report notes that unless
Canadian banks ramp up their cash management capabilities and
technology as client needs become more sophisticated, this may not
be the case a few years from now. Additionally, as the number of
electronic transactions grow and more banks outsource lockbox
services (a service offered by banks to companies that receive
payments to a post office), relying on a strong domestic footprint
may not be enough to retain corporate customers.
The number of businesses located in Canada is small relative
that of other parts of the world, especially considering the number
of large corporations. According to the Canadian Business Register,
there are approximately 1.1m employer businesses in Canada, defined
as any business maintaining a payroll of at least one person (may
include the owner). More than 75% of Canadian businesses employ
fewer than 10 people, and approximately 98% employ less than
Given that there are far fewer
large corporations in the Canadian market than in other markets,
middle-market customers are an important target market for most
Canadian banks. Cross-selling products and establishing deep
relationships with these customers is therefore extremely
Further, Canadian middle-market and
small-business customers are far more likely to have trading
partners outside of Canada than US businesses, thus requiring more
international cash management capabilities than businesses of a
similar size south of the border.
Similar to the US market, Canadian
banks view cash management as an important tool for growing
deposits; the value of deposits has grown as the cost of capital
has increased. They also see several opportunities within this area
to cross-sell additional products and deepen relationships with
Most Canadian businesses currently
use an average of three to four cash management products offered by
their primary institutions, making them a relatively underserved
market. Similar opportunities exist in the US market, where
customers average four to five cash management products.
Given the relative stranglehold
Canadian banks have in the marketplace, there has been little need
to differentiate their cash management offerings (including deposit
accounts, electronic funds transfer, card products and trade
finance), and banks instead have chosen to focus on customer
service. But Canadian banks also see increased desire for more
integrated and detailed information, back-office reconciliation,
and replacing manual processes with treasury automation.
Because of the limited number of
Canadian banks, cash management customers are unlikely to have
multiple bank relationships. While a US business may have different
banking relationships in different states, Canadian businesses
commonly have multiple relationships with one institution. Products
such as multibank reporting are therefore less important in Canada
than they are in other parts of the world.
This is starting to change,
however, as middle-market businesses that comprise a large
percentage of Canadian cash management revenues become more global,
increasingly establishing relationships beyond the US and Canada.
As this trend continues, global reporting across institutions will
see greater demand.
The importance of cash
As such, there is an increased focus on cash and liquidity
management, which provides more accurate and usable information to
corporate treasury groups so that they can accurately determine
end-of-day cash positions and day-to-day borrowing needs.
Unfortunately, much of this information exists across a variety of
internal and external locations, leaving many treasury groups
struggling to get information in the manner they desire.
Corporations that have invested in
technology solutions to interface with and consolidate information
across their banks (whether the solutions be homegrown or from a
bank or third-party technology vendor), reported greater success in
identifying cash needs than those that conducted such processes
Those performing it manually are
tasked with going to each bank’s online reporting platform,
gathering balance and clearing information, and aggregating it for
all of their banks. As the number of banking partners increase, so
does the time spent gathering information.
As such, many companies have
invested in technology solutions to automate this process. Such
systems poll an organisation’s banks and aggregate positions across
accounts, automating what could be a full-time process prone to
manual errors into a streamlined, easy-to-access, accurate process.
These types of solutions include treasury management
systems/treasury workstation cash and liquidity modules, multibank
reporting tools from treasury banks, SWIFT and others. For treasury
groups with these systems in place, accessing essential liquidity
information enables them to focus on using cash and liquidity
rather than simply identifying what it is and where it exists.
Small and midsize businesses in
Canada are also far more likely to require international
capabilities than are US businesses of a similar size. While most
Canadian businesses manage their treasury operations from Canada, a
large percentage require cross-border accounts. Canadian banks are
increasingly offering customers international capabilities, though
they take different strategies in doing so.
Canadian cash management customers
primarily have needs in the US. Rather than implementing offices in
the US, half of the top six Canadian banks have addressed these
customer needs by acquiring regional US banks.
Canadian corporate customers also
often have needs far beyond the US and Mexico, more closely
resembling European corporations than their neighbouring US
Tighter integration and
Canadian corporations want greater straight-through processing,
which requires tighter integration between bank systems and
customer enterprise resource planning (ERP) systems. Providing the
desired level of integration can be challenging for banks because
of the various formats in which the information comes. Tighter
integration is one of the highest priorities for Canadian banks as
they move forward with their cash management technology initiatives
over the next 24 months.
However, Canadian cash management
customers are becoming more sophisticated with greater global
needs, and large non-Canadian banks have increased their focus on
the region, planning to woo Canadian businesses with global
platforms and modern architectures.
While large Canadian banks’ online
cash management offerings are capable of meeting the current needs
of most of their clients from a functionality standpoint, they are
desperately in need of a face lift. Canadian banks can continue
making enhancements to older solutions and risk losing customers
down the road to new and existing competitors, or they can take the
plunge and invest in newer, more flexible and modern solutions.
Most Canadian banks recognise that
the usability and level of customisation of their cash management
offerings need to be enhanced to better serve customers, and also
recognise the need to invest in a new cash management and payments
infrastructure. The key areas of focus are customising user
interfaces, creating a single platform for all cash management
customers, converging single products through a common portal, and
A recent survey of small and
mid-size Canadian businesses conducted by the Canadian Bankers
Association found that only 35% of those businesses use their
bank’s cash management services, while only 15% use their bank’s
payroll services. Banks need to enhance the usability of their
solutions, migrate small businesses off retail banking platforms,
and help them better understand their cash management options.
While the Canadian financial
services industry has not been as severely impacted by the global
financial crisis as its US neighbours, the two countries share one
thing – a technology environment in transition.