Reshaping the future of corporate banking

Pascal Augé, head of global transaction and payment services , Société Générale (right) speaks to Daily News at Sibos about the growing importance of transaction banking for corporate customers

How has corporate banking changed since the financial crisis?

Before the crisis, corporates would have found it difficult to imagine that a well-rated financial institution could collapse. Since the financial crisis, corporates have become more aware of the counterparty risk linked to banks and their choice of transaction bank is now based on a more selective, relationship-centric approach. Transaction banking, which includes business activities such as cash management, correspondent banking, international trade finance, factoring and related currency services forms, more often than before, the basis of that relationship.

Transaction banking is now being discussed much more at CFO or even CEO level. Previously a corporate would choose a banking partner based on investment banking considerations such as corporate financing, M&A, equity financing and debt issuance. This is now changing, with cash management and trade also becoming important factors when it comes to selecting a banking partner.

Why is transaction banking becoming more important for corporates?

The growing importance of transaction banking in the corporate space stems from the need for corporates to manage working capital, liquidity and risk more efficiently. These organisations are seeking end-to-end cash management solutions that can better manage pools of liquidity in multiple regions. They need high levels of visibility of their cash in order to understand their liquidity positions and avoid either over- or under-funding subsidiaries. Pooling and sweeping mechanisms can help corporate treasurers to efficiently manage their liquidity and avoid having funds trapped in particular regions. As corporations expand operations into new regions, they need to partner with banks that understand the local markets very well and can advise the best strategy for local and global activities.

What are the challenges for transaction banks in meeting corporate banking requirements?

In order to provide end-to-end solutions, transaction banks must make heavy investments in technology to ensure systems are integrated and become more digital. This will enable the banks to deliver standardised and harmonised reporting and liquidity management to clients. Investment in security is also a top priority as cash management services move towards new frontiers such as real-time payments and mobile banking.

Transaction banks are required to provide traditional cash management and working capital products alongside new, value-added services such as FX and interest rate hedging, supply chain finance, factoring and securitisation. This is a challenge for transaction banks, particularly those that serve large multinational corporate clients that rely on their banks to provide efficient and safe cash management services across their international network.

Integration can be a challenge for transaction banks. While integrating trade finance and receivables solutions is relatively straightforward, integration of cash management services is more complex. These services are tightly linked to local clearing and payment systems, which have different reporting and regulatory requirements. This affects the ability to integrate cash pooling in these environments. This is where local expertise can be a differentiator for transaction banks.

Has SEPA helped integration efforts in Europe?

SEPA has been one of the most important influences on corporate banking in the past few years. While initially considered by some banks and corporates as a significant cost burden, the market is now ready to take advantage of the infrastructure that has been built. Initiatives such as SEPA are enablers and accelerators for harmonisation and the integration of cash management services.

Corporates realise that with XML formats, they can go beyond SEPA and drive more efficiency across Europe and globally. They are pushing their corporate banks towards greater XML integration of treasury services beyond the SEPA region. There is also a greater willingness among corporates to deploy the XML standard in more areas because they now understand the cost efficiencies that will result. Payment factories are coming back to the fore, with corporates eager to use their SEPA investment to drive efficiency.

You have mentioned that transaction banking is a costly exercise: how can transaction banks reduce their cost burden?

There are three types of banks that are involved in the transaction banking market: the big bracket, global players; regional banks; and purely domestically focused banks. The divisions between these categories are often blurred, for example, as some regional banks will provide strong domestic offerings in their markets of choice.

In order to help corporate clients to efficiently manage working capital and liquidity across all of their markets, transaction banks will increasingly partner with each other to provide bundled solutions that deliver the geographic coverage many firms require. Such partnerships will combine expertise in particular markets to provide in-depth services.

But the evolving landscape of corporate banking has attracted the attention of non-bank competitors; new entrants are competing in parts of the value chain. Internet-based entrants are disrupting the value chain. Overall, however, transaction banks have an advantage in addressing the entire value chain and also being able to make the significant investment required to offer holistic cash management and trade services and guarantee safety.

Transaction banking is an environment of high investment and taken in isolation, individual aspects of the value chain are often not profitable. It is unknown whether the new entrants can match the strength of transaction banks in this respect. However, there is a greater prospect that transaction banks can collaborate with new entrants, embedding their solutions into the overall cash management and trade offering in order to provide the very best solutions for corporate clients. Partnerships with non-banks have the potential to deliver faster and more cost effective services to some parts of the value chain.