By Joseph Neu
Out of the jockeying taking place amongst transaction banks in the global “top-five” list comes a buzz phrase that accurately sums up what guides global transaction bank relationships, apart from the credit relationship, and the challenges ahead for them. Credit for calling attention to this buzz phrase goes to JP Morgan Treasury Services, which used it in a recent write-up on liquidity management best practice:
“Whether the goal is to gain visibility, improve forecasting or ensure immediate liquidity, understanding in-country requirements and implementing the right technology is key. Banks that have established local expertise and strong global infrastructure can help corporates tailor liquidity management programmes that protect their organisation through turbulent times and position them for growth.“
Look hard enough and you will find some variation on this theme at almost any of the top global cash banks—and those aspiring to supplant them in the current wave of post-crisis, regulatory-reaction reordering of the global banking landscape.
Local First
It is probably no coincidence that JP Morgan leads with local expertise. Increasingly MNCs are looking for cash flow from markets where local challenges require local understanding, if not a local branch presence. Global banks have long claimed they can act local by offering the local knowledge and capabilities MNCs need, and local banks tout their global perspective, even as both point to bank partnerships to help accomplish this. Unfortunately, very few banks can execute on local/global claims exceptionally well.
Even the best have been described as “independent silos that sometimes successfully interact at random.” And that’s in reference to the local and global parts of a single institution.
Further, MNCs’ local and regional treasurers, and increasingly those tasked with business support, are turning more to local banks in markets where global connectivity is either not available or impeded by government control. Global bank partners can help in the selection of these local banks and the tie ups to their global infrastructure that are or become possible. But they should not be the only source.
Treasury professionals closest to the ground are wary that a global bank introduction to a local partner means a global bank price that is more than what a local bank might offer. And there is concern that the local expertise will get filtered to suit the global bank partner. Thus, peer exchange on who is doing what with which local bank, how and at what cost, is a useful reality check.
Changing infrastructure
Finally, smart treasurers will ask, if global banks have not solved the local/global problem yet, how will they do so as the game changes with new bank regulation and new technology, which also enables non-bank intervention?
SWIFT has been successful in providing global infrastructure linking more of these local banks MNCs are looking to. And this helps the global banks maintain and grow the reach of their infrastructure at less cost. However, SWIFT also helps local banks tap global infrastructure without relying as much on any one global bank partner.
Thus the emphasis by JP Morgan in the excerpt above on the right technology and strong (read lower operational and credit counterparty risk) global infrastructure.
Far more disrupting will be the technology that enables non-banks to encroach on bank business. This is likely to be first seen in transaction banking (see mobile payments) and in countries where local banking systems are weak (see mobile payments in Kenya).
This helps explain why global banks are so obsessed with innovation around new technology. Neither the global branch coverage of a Citi, nor the safety and soundness advantage of a bank, even one with the CDS-spreads of JP Morgan, will mean as much if non-banks can better deploy technology, escape bank regulation, exploit loopholes in financial controls and link to global infrastructure at much lower cost.
Don’t be surprised, then, if the local capabilities and expertise you really need are not with a local bank partner—or even a bank.