In the UK, 2009 was probably more traumatic for the banks than for their corporate clients. Both the banks and their corporate clients were battling against recession. Some banks and corporate clients were fighting for survival. The clients had public sympathy, but the banks did not.
Banks are no longer trusted advisers of corporates, understandably in light of the financial problems they have created for themselves and for the wider economy. Relationships between the banks and their corporate customers have become more distant, a trend that is likely to continue until the banking sector is restored to robust financial health. Such a prospect remains at least five years distant on the basis of the time it will take banks’ individual initiatives supported by the government to restore their financial health.
All corporate clients require access to the banking systems and selective banking services. In 2009, corporate clients wished to ensure they were locked into the key banking relationships to conduct and settle their transactions. At that time, banks were seeking to consolidate and retain their better quality corporate business. Financially strong corporations have spread their exposure to manage the risk of bank failure and individual banks’ inability to meet their full service requirements by establishing access to the banking system and banking services with two or more banks. They recognise the cost of this strategy, a cost they continue to renegotiate when they review their relationships periodically with the banks.
Corporate clients that lack financial strength currently face the challenge of limited competition for their banking services. Banks will act as a constraint on the expansion of the economy as the UK emerges from recession if they lack the capital base on which to respond to the transactional and funding demands of corporate clients’ business expansion plans. In the extreme, the UK government may have to retain a role in supporting the banking system’s response to economic growth. We may see the first signs of economic growth and the challenges that economic expansion places on banks’ services in 2010.
A further worrying trend is the perception of industry analysts and commentators that banks are failing to invest in business innovation, particularly in the technology to support and facilitate that innovation. The capital constraints on banks and the banking systems as well as the lack of demand from corporate clients ensured that the absence of innovation in corporate banking was not spotlighted in 2009. Failure to invest in innovation will become starkly apparent over the next five years. Banks will try to catch up by shortening their innovation development cycles, if and when funding becomes available. That tactical approach reduces the likelihood of success and heightens the risk of innovation.
There is merit in examining some of the core banking services that corporate banking client access: payments, cash management, credit and working capital.
Transaction services, which have payments at their core, have grown and continue to grow globally. Competition among banks to provide low-cost, efficient payment services has become mired in the political, regulation and compliance agenda of implementation of the European Commission’s Payment Services Directive (PSD). Banks and other payment services providers that are placing payments at the core of their client services strategies have been competing for payments business by acquiring the payments business of banks that wish to sell off or outsource their payments business. Some corporate clients already receive the business benefits that the PSD intended to deliver. Others have yet to see the benefits of the PSD emerge from their payment service provider. In both situations, the corporate clients are one step removed from the payment process. They find it difficult to compare competing payments services from the perspective of the PSD.
Corporate cash management will remain an internal function, and corporates are unlikely to seek new cash management services externally unless the services are accompanied by appropriate credit and funding facilities. The locus of corporate cash management is unlikely to change for most of 2010.
Corporates locked in their credit and funding arrangements for 2009 and 2010 with banks back in 2008, in expectation of the reduction in the availability of working capital and credit services from banking institutions. Unfortunately, those corporations that were unable to secure credit and funding facilities or did not anticipate that credit would be difficult to secure in 2009 are finding that the financial pressure on their business has compounded the financial pressures of their business from the recession. Towards the end of 2010, the European economy is likely to see some increase in industrial and consumer demands. Corporate banking clients are likely to renew demands for working capital and credit facilities. The question is whether the banks will be sufficiently healthy financially to respond adequately to those new corporate funding and credit demands.
Two key messages emerge about corporate banking relationships. First, with the exception of start-up or corporate clients seeking their first major funding facility, banks will have to wait a generation until they can regain a role as trusted adviser to a corporation. Second, banks will come under renewed pressure from corporate clients and the governments if they are unable to respond to the demands for funding and credit as they emerge from the recession.
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