Economic Recovery to Switch Corporate Focus on Cash for Growth

The main focus for corporates during 2014 will be how best to leverage cash as the global economy moves into growth, according to Royal Bank of Scotland (RBS). Rates are poised to rise and banking regulations will increasingly take effect as the year progresses.

The bank suggests their challenge will be in applying the best working capital structures to minimise debt, while at the same time making the most of long market positions around the world.

”Corporate America will look to reduce exposure to interest rates and cut borrowing costs as the US Federal Reserve starts tapering its asset purchase programme – the first step towards tighter monetary policy,” says Julian Oldale, head of international cash management origination at RBS North America.

“There is likely to be a greater push to consolidate working capital flows at a central treasury level. That should drive greater regionalisation of treasury centres and concentrate risk with core relationship banks.

“Banks will have to respond to corporates who want their treasuries to have clear sight of global liquidity positions so they can manage working capital, minimise the cost of funds and maximise the benefits of running a global operation.

On the introduction next month of the single euro payments area (SEPA), Oldable says companies with large European operations will use its simplified collection and payment methods to calculate days sales outstanding (DSO) and days payments outstanding (DPO) and other metrics.

That means corporates are likely to consolidate their banking partners given their lower reliance on in-country solutions.

As the economy recovers, many cash-rich companies will increasingly look for merger and acquisition (M&A) opportunities. That brings with it unique challenges in how to bolt on new treasury operations effectively. Banks will play an important role given the experience they have gained in the past.

Corporates are likely to call on their banking partners to leverage their knowledge to smooth the integration challenge in areas including project management of account conversions, format changes and enterprise resource planning (ERP) integration.

Banking Alliances to Accelerate

The year ahead could also be one when banks finally start to forge global alliances to deal with stiffer regulation and cost pressures, suggests Carole Berndt, global head, transaction services for RBS. The trend would naturally lead towards greater standardisation.

“Banks would offer corporates one point of contact yet still give them access to networks that span the world, much like airline alliances today,” says Berndt. “This should allow banks to deepen relationships with customers and reward them for their loyalty – much as airlines offer air miles.

“Corporates will start to slim down the number of banking partners under this alliance model, yet be able to tap greater expertise and more services. For banks, that means focusing on their areas of strength, and in areas where returns are not high enough, teaming up with a partner and retrenching.”

Berndt adds that the banking alliance model is a further step towards industry standardisation. Banking partners will develop common systems.

“We have already seen the beginning of this with SEPA. Corporates will benefit as banks become more efficient in managing their own costs. Are we as banks willing enough to let these relationships develop? The pressures bearing down on the sector make it foolish not to do so.”


Related reading