All part of the service
In an era when the custodian community is desperately attempting to reinvent itself, the less than glamorous concept of cash management rarely finds itself in the spotlight. The notion of ‘the custodian, as a discernibly unglamorous and low-tech anachronism, is no longer compatible with the ‘image-is-all’ focus of today’s big players. It is a rare sight indeed in this day and age to find a custodian bank readily citing the joys of the more mundane and traditional back office chores, sorry, tasks. But that doesn’t mean that they are no longer considered valuable assets to lure in new business, and cash management is one of many sectors that the custodians are continually espousing as proof of their diverse product suites and multi-lateral client services.
But for all the rhetoric, is the world of cash management really evolving at the same pace as ‘sexier’, front-end products? There is no doubt that an effective and well funded cash management division can make a sizeable impact on the quality and consistency of client service and one would therefore hope that the banks are treating this area with the respect it deserves. In fact, many of the larger banks offer a sizable array of products which fall under the banner of cash management, including payments, collections and liquidity management solutions for both domestic and global clients.
Clearly, despite its dour image, this is a sector that should be overlooked at one’s peril. Yet the surfeit of sub-divisions that constitute cash management can make a clear definition of the subject difficult to pin down, as Mark Andrews, head of finance and treasury services at HSBC Global Investor Services, explains: “The definition of cash_management covers a multitude of sins, including effective administration, processing capabilities, timely and flexible reporting and a range of value-added services and investment options to enable clients to maximise cash yields.”
From a global custodian’s perspective then, cash management is the effective servicing of the client’s cash needs throughout the entire investment process – from funding to eventual repatriation of proceeds.
Unsurprisingly, in today’s diverse climate, there is a considerable element of pick and mix available to the end user, enabling them to create a bespoke cash management suite to suit their own purposes. “Clients can dip in and out of these services depending on their changing needs,” notes Andrews. “Some clients utilise only a very small range of our services whilst others have decided that the best way to maximise value on cash is to reduce internal costs by outsourcing wherever possible,” he explains.
Flexibility then, must be a central component in a bank’s cash management offering, a fact that Ryanne Cox, head of global banks and brokers at Kas Bank, London, is keen to stress: “Kas Bank offers cash management services as an integrated part of its core business: clearing, settlement and custody. Key to the cash management service is its flexibility to meet the client’s profile and requirements and to offer a tailor-made solution for each client.”
Given the clear benefits afforded to the client by efficient cash management, it should come as no surprise that many custodians consider it a valuable market differentiator when a potential client is deciding on their custodian of choice. While few believe that in itself, cash management can influence a client’s decision, most custodian’s are quick to highlight the importance of efficient cash management in their overall package.
Günther Gall, senior vice-president of cash management, financial institutions and infrastructure, at RZB Group, elaborates: “Cash management is a clearly defined core product of the RZB Group. We invest strongly in technology and make huge efforts in developing this product together with the users – our customers.” Yet, he concedes that while cash management represents an additional service which may help for cross-selling, the real breakers in the custody business have changed little over recent years; namely settlement efficiency, special reporting capabilities besides SWIFT, and a solid customer relationship management (CRM) and price.
HSBC’s Andrews agrees, pointing out that a large custodian will have a product range extending across many diverse fields. “Clients are not homogenous and will always place emphasis on different aspects of a potential service,” he explains.
In these times where the external market is notoriously difficult, clients are placing more emphasis on getting their cost base right and consolidating their fundamental concerns, such as effective funding to minimise overdraft costs. Consequently, Andrews admits that “the treasury/cash management function is an important, but not dominant, focus”.
It is apparent that the pace of change must be constant and unilateral for today’s custodians, and no sector can be overlooked if they hope to maintain and improve their market position. Cash management is no exception. Over the last 18 months consolidation and harmonisation have bolstered massive change in the custodian environment. Kas Bank’s Cox elaborates: “Our expanding European profile has created an increasing number of markets in which to offer an integrated service platform, including cash management.” Consequently, Kas Bank has implemented a host of reforms, including enhanced on-line reporting capabilities and further automation of cash projections and day-end balance regulation.
RZB too, has been quick to respond to the growing demands of clients, citing in particular the introduction in July 2003, of new European Union (EU) regulations. Says Gall: “From this date, banks will have to offer domestic fees for cross-border payments in euroland. This will lead to many changes in our internal applications.”
Gall also draws attention to new developments in market infrastructure, which he believes will act as a catalyst for new products for corporate and financial institutions, essentially in the field of mass payment services.
However, many of the large players consider cash management to be a mature and well developed field and, subsequently, predict little in the way of dramatic change going forward.
Beatrice Le Terrec, product manager of global cash services at BNP Paribas Security Services (BP2S), is sceptical of any reforms which cast themselves as radical in this area: “I don’t think there are any major initiatives which could really improve cash management,” she says. “The market is very mature and there is no real innovation in cash management. There is a SWIFT rule to process payments and we will certainly see new messages, but aside from such details there are no major initiatives we are waiting for.”
Despite this current inertia, cash management, like every other area of financial services is being affected by at least one significant trend, that of outsourcing. Many firms, either by creating subsidiaries to handle this sphere or by posting it to a specialist house, are finding that outsourcing cash management pays major dividends.
RZB Group, for example, outsources its back office to a subsidiary group, Raiffeisen Daten Service Center, while HSBC’s Andrews predicts that “the outsourcing debate will continue and all institutions will have to reassess their cost base and their core competencies”.
However, not all firms have been as quick to leap on the outsourcing bandwagon, and as BP2S’s Le Terrec explains, BNP Paribas has taken a different route: “There was the opportunity to outsource cash management to the BNP Paribas group, but we decided to insource it to BP2S. This was to ensure that we had a minimum standard offering in cash services.”
Clearly, the debate will continue.
Ultimately, in a market where the discerning client has the last word, the key consideration remains transparency. As customers demand ever-greater degrees of comparative data, all players are searching for the X factor that will provide them with the edge they require. “Transparency will continue to be a key issue,” says HSBC’s Andrews. “We are examining a number of initiatives where we can demonstrate the effectiveness of our processing and the fairness of our pricing across a range of products,” he explains.
These other products vary in scope from bank to bank, but may come in the form of mutual funds, pension and life insurance products, equity and money market and foreign exchange products. It is this range of alternatives which allows the client to maximise the use of settlement and transitional related cash balances.
For an industry which is going through a remarkable period of change, the custodians’ commitment to efficient cash management remains surprisingly focussed. While its maturity suggests that little can be done to significantly improve the cash management sphere, the fact remains that the industry is continually evolving. Web-enabled services for example, are one of the many areas where fine-tuning will continue to improve client service, while EU reforms and consolidation inside the industry should further enhance the range of flexible, bespoke solutions on offer. As Andrews concludes: “From the custody perspective, cash is an integral asset to be serviced and clients are better informed and more demanding regarding cash and treasury services. It is unlikely that any custodian can maintain client satisfaction and their long term viability unless they can service the asset with the same consistency as the traditional securities focus.”