Making bank partnerships work for corporate treasurers
Corporate treasurers are under pressure to reduce costs, improve efficiency and enhance visibility and control across their global operations.
One straightforward way to do this is by consolidating banking services to a handful of international network banks, which enables cash management-related processes to be standardised, and eliminates the need to maintain multiple local bank relationships.
But finding the right banks for the job can be tricky.
To evaluate banks, corporates need to consider the risk profile of potential partner banks: the extent of their product standardisation globally (and the pricing benefits this delivers); their technological security; and the level of service they offer.
One additional factor, which is sometimes overlooked by corporates, is the approach taken by international banks to local markets.
As they are unlikely to have an extensive branch network to adequately service their clients’ needs in every country, international and multi-regional banks must find ways to extend their coverage and capabilities. Different operating models come with various advantages and disadvantages - understanding the implications of these models can be critically important.
How global banks approach local markets
Typically, international banks supplement their domestic network coverage and cash management capabilities through alliances with local banks. The aim is to enable seamless transaction initiation and reporting, even when corporates have accounts with local banks.
Integration is usually accomplished via a host-to-host or SWIFT interface with a corporate’s enterprise resource planning (ERP) system to facilitate payment initiation, receivables reporting and multi-bank sweeping.
There are two main types of alliance model:
1) The direct, nostro-based model uses an international bank’s nostro account with a local bank to receive deposits or make payments on behalf of a corporate. As corporates don’t need to maintain a relationship with a local bank, this model is often preferred by treasurers; it facilitates a rationalised account structure, streamlined services and the use of a single electronic banking channel.
2) The indirect, non-nostro model requires a corporate to establish an operating account with a local bank. Between the local and the international bank, a host to host connectivity is then establish to enable the company to initiate payments from and reporting on their local bank account using the international bank’s online platform. Crucially, service arrangements, including pricing, are usually negotiated bilaterally between the corporate and the local bank.
Diagram 2: Indirect model, host-to-host connected and platform interfaced
Assessing alliance models
The alliance model is valuable for many corporates because it avoids the creation of a complex, costly and inefficient bank account infrastructure.
However, it’s important to note that not all partner bank models are the same. There are various dependencies, such as regulations, market practices, local bank technology and service standards, which determine the quality of a partnership. Corporates therefore need to do extensive due diligence to clarify the capabilities of the international bank at country level.
Once a corporate has done this, they should identify whether a direct or indirect alliance model would best suit their needs. In most circumstances, the preference for a rationalised account structure may favour a direct model. However, where local business needs are complex, an indirect model can still provide a treasurer with efficiencies, including the use of a single electronic platform for payment initiation and reporting.
Understanding who does what
Regardless of the model chosen, it is critical to clarify the split of roles and responsibilities between the international and local bank. In particular, it is necessary to understand the level of integration between the international bank and local bank to enable processing and reporting of transactions, and the way in which client services are provided.
With most partnership models, the goal is an automated, seamless and straight-through-processing connection between the international and local bank. The direct model usually offers a high degree of bank-to-bank system integration that should enable, at a minimum, same-day value processing with detailed transaction information to facilitate automated reconciliation.
In the indirect model, the challenge lies in the client interface or in the difference in functionality of the international and local bank’s online banking channels. Corporates would likely find more custom functionalities or specific cash solution features available on their local bank’s online platform than on the international bank’s platform.
Delivering high standards of client service is always a challenge for any partnership – and this is harder still in an indirect model. While corporates may expect the international bank to be responsible for all aspects of customer service, this is only feasible if the two banks have an agreed engagement process and similar service culture, including an understanding of the standard of service delivery expected by large global corporates.
To ensure this is the case, corporates should check if there is an agreed and aligned service engagement process between the international and local bank, covering operational processing, client onboarding, and transaction enquiries. Similarly, there should be a clear escalation process. Often senior engagement and strategic alignment between the international and local bank help to ensure a more streamlined client service proposition.
Corporate’s account with:
|Local or third-party bank||International network bank|
|Connectivity||MT101/940||Host-to-host connection||Host-to-host connection|
|Capabilities (available via the international bank’s online platform)||
Transactions occur at the local bank and post to the international bank’s nostro account:
|Benefits||While the corporate account is with the local bank, this arrangement allows the corporate to continue using the international bank’s online channel as a single online platform for payment initiation and account/balance reporting.||While the corporate account is with the local bank, this arrangement allows the corporate to continue using the international bank’s online channel as a single online platform for payment initiation and account/balance reporting.||
|Limitations||Service engagement is directly between the corporate and the local/ third-party bank.||Service engagement is directly between the corporate and the local/ third-party bank.||Domestic cash management services are limited to rudimentary services like cash and cheque collections.|
Achieving an ideal bank partnership
International banks and their network of local cash partnerships can bring significant benefits to corporate treasurers. But the devil is in the detail. To establish bank partnerships that are both fit for purpose and sustainable, treasurers need to ensure they have done their due diligence, and should establish expectations and delivery standards at the outset. The same partnership can work very differently for corporates if these initial processes are not undertaken. With a high level of engagement and collaboration, a near-ideal partnership can be built and sustained to the benefit of all parties involved.
By Byron Gardiner, Treasury Solutions and Joey Lee, Network Management, Transaction Banking at Standard Chartered.