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In many ways, cash management is an ideal business for banks emerging from financial crisis. Helping companies manage treasury funds is a relatively stable business, which attracts deposits and generates predictable fee income. It typically brings higher price-to-earnings multiples than more volatile trading or principal businesses. And as a service-based business, it requires little regulatory capital allocation, except for operational risk.
Given these strengths, many banks are setting ambitious goals for cash management growth and even launching new cash management services in some markets. However, the cash management landscape is evolving in ways that will require strategic thinking. Chiefly, the market is becoming more stratified.
A number of trends are driving this change. To begin, the biggest banks are getting bigger via mergers and acquisitions (especially in the United States), which is widening the gap between first- and second tier players. We also see the emergence of a pan-EU market; the growth of international services to support globalization (which solidifies the global banks’ role); and a greater demand for tailored, sophisticated products that meet the needs of target customer segments.
Finally, while large global cash management banks have traditionally dominated this market, a number of regional and domestic banks are entering the playing field.
Investing in cash management
Cash management providers’ help companies accelerate the collection of receivables, control payments to trade creditors and efficiently manage cash—services that are especially appealing in times of constrained credit. This is an increasingly sophisticated business requiring substantial, sustained investment.
In mature markets, regional banks spend tens of millions of dollars annually to maintain competitive parity, while global players often spend hundreds of millions on sophisticated platforms to serve their multinational clients. Even in developing markets, the cost of implementing basic cash management capabilities can easily run to several million dollars. Moreover, installing a cash management platform and integrating it with a bank’s core system can take 12 to 18 months and require substantial management resources. Investments of this magnitude require careful consideration.
The best approach in today’s market is :
• To be clear about the type of competitor the bank is, or wants to be, and
• To build a tiered set of capabilities, products and services to serve specific markets.
The cluster effect
In most regions, the cash management market is splitting into distinct global, regional and local clusters.
Local banks can be formidable competitors in their home markets. They are usually situated in a small to mid-sized country within a wider region or in a state, province or metropolitan area in a larger country. Their offerings depend primarily on the maturity of the cash management business in their market. In established markets, local players tend to offer a comprehensive range of basic cash management services to small and medium enterprises (SMEs) and mid-market and public-sector customers. In less developed markets, a local bank may serve large local companies and government entities with only rudimentary payments, collections and deposits services.
Local banks have a key competitive advantage their branch network. They usually have a higher branch density in their home market and are more willing to handle cash collections and payments, a critical service for SME and mid-market clients. Local banks are also the primary lenders to these clients and can leverage those relationships to win their cash management business.
Regional banks are the primary providers of cash management services to local or regional companies, as well as to global companies operating in a particular region. Regional banks can be quite large; some even rank among the largest banks in the world. But unlike global transaction banks, they focus on serving clients from or in their home regions, where their operations are usually concentrated.
Regional banks fall into two subcategories,
Pan-regional, and
Multi-local.
Pan-regional banks offer cash management across all or most of a region (or nationally in the United States). They specialize in providing consistent, integrated cross-border cash management services to companies that operate across the region, typically Local/niche market
Bank range of activities
Client portfolio
Multi-local/regional National/global
Small enterprises
Medium corporates
Large corporates
Multinational corporations
Regional players
The cash management market is splitting into distinct global, regional and local clusters larger regional companies or multinational corporations (MNCs) that need a regional specialist. Pan-regional banks often compete with global transaction banks at the upper end of their customer base but also serve the transaction banking needs of local or regional corporate customers.
Multi-local banks serve the needs of companies in a few national markets or in several state, provincial or metropolitan markets. Multi-local banks may be as big as their pan-regional counterparts but do not offer true cross-border capabilities. Rather, they focus their marketing and sometimes their product development on the needs of companies operating in these local markets, usually lower middle-market companies, SMEs and public-sector entities. At the upper end of their customer base, they compete with pan-regional banks. Perhaps the best known cluster comprises.
Global transaction banks, which serve the global cash management and trade services needs of MNCs. Their global operations encompass offices in most major commercial centers and in some cases, domestic banking operations in multiple countries. They usually have stand-alone, transaction banking business units that serve large corporations, while their domestic commercial banking divisions may provide SME and mid-market cash management. In emerging markets, these banks may partner with local banks to provide downstream collections and payments services while they focus on the “upstream” liquidity management and investments business. Of course, not all banks fit neatly into these categories. For example, global transaction banks often have separate regional cash management businesses that operate like pan-regional banks. There are also specialist banks that focus on certain product areas or vertical markets.
A tiered approach
To compete successfully in such a stratified business environment, banks can offer tiered cash management products and services tailored to the expectations of their target customers and to local market conditions service bundles for SME, mid-market, large corporate and MNC customers, as well as specialized products for individual industry sectors. The required investment increases for each successive tier, thereby limiting the number of banks that can compete successfully at that level.
In general, cash management service tiers include:
Basic payments and deposits, accounts with the basic capabilities to make and receive payments through the main local mechanisms, including checks, electronic transfers, wires and cash. Often included is the ability to view account balances and activity and initiate simple payments online.
Basic payments, international services, basic trade, FX and international wire services along with domestic payment services.
Basic cash management. Basic payments and deposits plus a no-frills suite of cash management products, including a feature-rich online banking service, receivables, batch or online payment origination, reconciliation, physical sweeping, zero-balance accounts and overnight/ short-term investments.
Full-featured cash management products. A complete suite of payables, receivables, information, liquidity and investment products to match the breadth and functionality of local competitors’ best-in-class products. May include technology platforms that can integrate with clients’ enterprise resource planning (ERP) systems.
Competitively differentiated products. A full suite of cash management products plus a few products that are unique, best in-class or targeted to specific market segments, such as a receivables service specifically for healthcare payments.
Custom solutions. Unique services tailored to the needs of individual customers typically large corporations, MNCs or national governments. Once a bank understands the competitive dynamics of its markets, deciding which service tiers to offer should be relatively straightforward. The following hypothetical examples illustrate the tiered approach.
Case 1: The Defending Local Champion
A leading local bank in a developing country enjoys a commanding share of the commercial banking market. Neither it nor its local competitors offer cash management services beyond basic payments and deposits, but as the local economy opens to global trade, competition from global banks is stiffening. Global banks offer international trade and cross-border payment services to premier customers and compete for local deposits by providing liquidity management and investment services to MNCs and large, local corporations. This bank does not presently aspire to grow beyond its local market, nor does it wish to invest in full-scale cash management services. It does, however, hope to maintain its leading role in its home market. Its response is to supplement its basic offerings with domestic collections and payments, cross-border payments, trade finance, FX and foreign account products that are white-labeled from a global bank operating outside the local market. The local bank thus manages to retain its domestic position while meeting its best customers’ international treasury needs with minimal investment. It also gains a new source of business when the global bank agrees to provide in-country payment and account services through the local bank.
Case 2: The Middle-Weight Regional Contender
A regional bank in a mature market has neglected cash management for years while undergoing a series of mergers. Consequently, the bank now lags the competition in several key product areas. This bank has historically served a broad array of customers, but competing in multiple segments has become too expensive. Furthermore, the bank’s attempts to serve the upper end of the market by customizing products have left it with a costly patchwork of non-standard systems and processes that are too complex for its mid-market customer base. This bank must narrow its focus and invest in IT. The core of its business is mid-market customers in a few key markets, and so it devises a multi-local strategy of building strong, deep relationships with these customers through responsive service and consultative sales. The bank invests in products that attain competitive parity with typical market offerings but offer reliable, basic functionality and ease of use instead of advanced features. Third parties support some of these products while the bank focuses on sales, service and delivery. The regional bank leverages its wide branch network to provide transaction services to mid-market clients. Thanks to its keen understanding of a couple of markets, the bank targets locally important industries with distinctive products. Using this selective approach to product differentiation, the bank prudently invests in a few leading-edge systems that deliver outsized share in some narrowly targeted market segments.
Case 3: Winner by Technical Knockout
A global bank has a leading market share in a few key cash management product categories, but other global banks and smaller regional players are investing in similar capabilities and threatening the bank’s leadership. The bank has balked, however, at extending credit to the broad array of companies needed to cement its competitive position. Moreover, its aging IT platforms need a significant upgrade. This bank makes a virtue of necessity by investing in innovative IT systems to support its key products and to deliver pan-regional and global cash management services. Though costly, the industry-leading products will generate revenues that will fund further development. In time, the bank will gain ROI from scalable platforms that reduce operating costs and expedite time-to-market with product innovations. The bank integrates its IT systems with its leading clients’ systems and offers a full suite of treasury outsourcing products, thereby locking these clients into multi-year relationships and creating
an annuity income stream.
Strategically, the bank’s objective is to redefine market expectations and to overwhelm competitors who lack the volume to lower costs or to fund necessary product development. To further entrench its market leadership, the bank aggressively resells a white-label version of its product to other banks, reaping revenues beyond its own customer base and eliminating one more reason for other banks to develop competing products.
As these examples demonstrate, banks of varying sizes can successfully vie for a share of the intensely competitive cash management business. A bank simply needs to know its strengths and target them to select markets.
While the cash management business can be challenging, it offers a rare stability and potentially lucrative source of income in difficult economic times. Banks must only choose wisely how and where they want to play.
To compete successfully in such a stratified business environment, banks can offer tiered cash management products and services tailored to the expectations of their target customers and to local market conditions.
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