The traditional global banking approach of ‘one bank fits all’ is rarely pursued by large corporates today, due to the inherent concentration of risks such a solution brings from financial, operational and counterparty risk perspectives. Corporates now tend to want regional support from their banking partners; banks that can provide transaction banking, financial support, acquisition advice and other key services on the ground. This approach fits well with the way that large banks themselves are organised with regional decision centres (credit risk and transaction banking, including trade finance operations) and regional customer service centres.
With access to credit still a scarce resource, visibility and control over cash has become critical and a well-considered regional banking approach can help corporates maximise control and access to cash. In addition to the standardisation benefits of working with a reduced number of banks, most banks have now developed regional liquidity structures allowing for:
- Open economies: seamlessly concentrating their cash positions into one single location on an end-of-day basis, leading to a reduction of credit facility needs and providing corporates with full control and access to cash.
- More regulated economies: benefiting from an interest optimisation scheme, leveraging the trapped cash positions left in one country so that they can benefit from better interest conditions or to access credit in other parts of the world, i.e. ‘reciprocal lending’.
Strong regional banks, which can fit with the regional requirements of a corporate client, may well have a competitive advantage. Those banks considering a possible withdrawal from what they deem to be peripheral markets may wish to consider that some mandates now tend to go to the bank with the greatest coverage.
Partnership Models: Different Approaches with Potentially Different Consequences
No bank can be everywhere and so partnerships with local banks are often essential. Before engaging with the regional bank’s proposed partner bank(s), it is essential for the corporate to analyse the depth and effectiveness of these partnerships (see Figure 1) as well as the implications of working with a partner bank, either directly (such as a no competition model) or indirectly (such as product and service co-operation).
Figure 1: Key Considerations for Partnership Approaches
No Competition Model
In this model, the regional bank will establish tacit or formal agreements with local banks in the countries where it has no presence. This model can be attractive if, by doing so, the regional bank is able to propose complete regional coverage with a limited number (ideally one) of partner banks.
The challenge for regional banks is how to find a partner that is unlikely to be a competitor, but still has the credit rating and operational capabilities to meet their clients’ needs. The choice is between continuing to be the customer contact point for the client and then passing on instructions to the partner bank; or recommending a local institution and letting them deal directly with the client. Providing a consistent customer contact is likely to bring greater competitive advantage, especially if the bank can take responsibility for providing a smooth and seamless service and dealing with any relationship issues.
The challenge for the corporate is to work with a partner bank which may not be part of its core banking relationships and therefore only willing to support their cash management requirements, but not their in-country credit requirements such as local guarantees, technical or overdraft credit lines. In addition, in case the partner bank does not want to support the central corporate credit requirements – for example, participating in long-term funding of the group – this situation may create some tension with the other main banking relationships. For instance, if the main relationship bank can support part or all of the corporate requirements in that particular country, they may claim they have the right to get access to the cash management wallet, not the envisaged partner bank. In this scenario, the corporate may be better served by working in that country with another of its main relationship banks that has an in-country presence, rather than working with the proposed partner bank.
A variance of this model is the local co-operation model. In this scenario, the corporate accounts are held centrally with the regional bank; for example, this may be the UK where the corporate has its headquarters, but not in-country where it has a subsidiary operation. Although the corporate will not have an account domestically, all electronic collections and payments (e-payments) would be made centrally, applying local conditions, while the processing of the payments and collections would actually be outsourced to a shadow partner bank in-country. Although this solution might be seen as attractive for certain corporates which have limited activities in certain countries, it not may be efficient for others as it does not provide a good solution for non-e-payment instruments, and in most cases, will not provide a solution for domestic credit line requirements if needed.
Product/Service Co-operation Model
In this partnership model, the regional bank will establish a physical local presence, typically with one branch only, and will be able to serve directly all of the corporate’s e-payment needs as well as provide them with local financing support. The paper-based and country-specific requirements, such as cheques and cash deposits, will then be served by a local partner bank with a strong local presence, without the need for the corporate to open an account with that partner bank.
The quality of this partnership may differ from country to country as the partner banks will be different. In some cases, the regional bank will become a competitor to the partner bank for all domestic local electronic operations, which may in reality weaken the partnership. Also, the regional bank may be limited in its ability to provide deep in-country financing due to local regulation limitations, meaning that the corporate will need to work anyway with a local bank to satisfy its financing needs.
In this scenario, all key considerations listed in Figure 1 should be carefully reviewed in order to assess the real value and quality of this proposed partnership.
As usual, no one banking model fits all corporate requirements. As corporates seek to develop their presence in fast growth emerging and frontier markets, a careful review of the domestic requirements will help corporates make the right choice when it becomes to selecting the best regional banking structure, with or without the use of partner banks.
It is recommended that banks work with their corporate clients to help bridge any potential gaps in the local financial infrastructure and overcome challenges in areas such as financing, risk management, currency convertibility and repatriation of revenues.
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