Corporates are getting fickle. Where once upon a time banks could be fairly certain of being able to rely on their cash management clients to mostly stay put and provide a steady stream of business year in, year out, that's no longer the case.
The trend now is to maintain relationships with a suite of banks, often to help navigate the specific challenges of different markets. Companies doing business in China, for instance, are likely to keep an account with Bank of China for those transactions.
Gone are the days of a primary bank securing the vast bulk of business. Growing networks and complexity have created a shift toward “multi-banking”. According to research from East & Partners Asia, primary banks now get 51.4% of market share while secondary banks get 28.3%. Compare that to five years ago, when primary banks got 61.3% market share while secondary banks got 20.1%.
“Part of the balance of power has shifted the customer away from the bank,” said Lachlan Colquhoun, chief executive of East & Partners Asia, a business banking market research firm.
During and in the immediate wake of the global financial crisis, companies hung on to their primary banks and were reluctant to go elsewhere. Now, as business conditions have improved, they are looking around more — and they see multi-banking as prudent risk management.
Many Asian companies are expanding rapidly, particularly within Asia, spurring increased demand for cross-border cash management products and solutions. Intra-regional trade has been growing especially fast. Post-crisis, companies have also shown less loyalty and are more willing to move banking business to competitors if and when an opportunity presents itself. According to Ernst & Young, nearly one in five companies has changed its primary bank in the past year.
Notably, there is a big gap in customer satisfaction in emerging Asian markets compared to developed Asian markets. Some 27% of companies in emerging markets have reported changing primary banks in the last year, compared with 10% in developed Asian markets.
This shift toward using multiple banks for cash management is part of the same trend that companies have been adopting in other areas of banking – diversifying in order to reduce counterparty risk. This has caused banks to lose some footing while corporate customers have gained leverage.
The result has been shrinking market share for market leaders. And industry insiders say this doesn’t seem to be a temporary or cyclical trend.
While the big three of Standard Chartered, Citi and HSBC have managed to hold the majority of market share for now, others, such as DBS, Bank of China and ANZ, are looking to gain market share and convince customers to make them their go-to primary bank.
“In an uncertain banking landscape, clients increasingly prefer to diversify their bank portfolio as a risk mitigation measure,” said Chye Kin Wee, head of transaction banking for Asia Pacific at BNP Paribas. Those risks are linked to the banks’ capacity to process payments in a timely manner and to act as a safe harbour for deposited funds, he said.
Others agree. “I would have been a little cautious two years ago because the trend was very new then, but this is directly correlated to the growth potential in the region," says Mahesh Kini, Deutsche Bank's head of cash management corporates for Asia Pacific. "Because of the increased complexities, the pie has become bigger. I would think it’s a fundamental change."
In the past, it made sense to pick one bank or to share business among core relationship banks, Kini said. But now companies are looking for best-in-breed everywhere; they want to pick the best in each country instead of one bank for the whole region. Research from McKinsey found that Asian medium and large companies used an average of 30 or more banks.
BNP Paribas’ Wee said that multi-banking created opportunities for banks to offer clients multi-bank platforms for payment initiation and transaction reporting. BNPP, for instance, has introduced Centric, a single portal that integrates various platforms and gives customers a full range of banking services, such as trade and supply chain management as well as foreign exchange.
Growing pie, shrinking share
The bullish outlook for the cash management business in Asia has attracted a plethora of players. Global, regional and local banks are competing for market share.
In addition, banks are also facing more and more competition from non-banks such as technology companies, internet firms and alternative asset managers that are expanding into lending, trade finance or foreign exchange.
Non-banks are moving into financial services in a big way in Asia. China featurs Alibaba's wildly popular online payment platform, Alipay, while Tencent has ventured into online banking with WeBank. Philippine telco Globe offers an increasing array of payment services, while PayPal is also gaining momentum in Asia.
Cash management is one of the more vulnerable financial subsectors to competition from non-banks, according to a report from Ernst & Young. One of the traditional advantages banks had was exclusive access to international networks for cross-border clearing and settling. That is still the route for most business but third-party platforms do make it increasingly possible for banks and non-banks to offer customized cross-border services.
In a survey conducted with more than 2,000 commercial banking customers last year, Ernst & Young found that 10% of respondents already used a non-bank for cash management services. A further 29% would consider doing so.
In this, corporates are showing themselves to be much more flexible than individuals: in a similar survey of wealth management customers, only 4% of respondents said they use a non-bank and 14% said they would consider doing so.
Customer loyalty in Asia is particularly complex, and the fragmented nature of the region's juridisctions and regulations makes it difficult for any single bank to excel in all countries. There are still markets with non-convertible currencies and limited ways to repatriate funds.
As expected, the less developed the jurisdiction, the more scope there is for non-traditional players to secure a foothold. In the E&Y report, 71% of respondents in emerging markets in Asia Pacific said they currently use a non-bank.
Teaming up can be one way for banks to capture business they might otherwise miss out on altogether. Deutsche is working with regional and local banks to deepen networks, notes Kini. In China, for instance, some tax payments require a local bank, so Deutsche Bank partners with a local Chinese bank to facilitate the transactions.
The smaller regional banks, meanwhile, can benefit from these relationships with larger global banks on power clearing and technology. This gives smaller regional banks a leg up and levels the playing field to some extent.
It's worth trying every possible route into business at the moment, as the cash management market in Asia is looking extremely attractive. The region has emerged as the largest transaction banking market in the world, according to McKinsey, with post-risk revenue of about $323bn, or 53% of global transaction banking revenue. Revenue is estimated to reach $578 billion by 2017, and China is expected to account for about two third of that.
McKinsey suggests that banks are increasingly overlapping and going after the same customer segments. Global players are targeting mid-corporate and even smaller or medium-sized enterprises, which were traditionally serviced by domestic banks.
Meanwhile, local banks are expanding and in some cases matching foreign institutions in cash management services. Foreign bank market share in domestic cash management in Asia fell to 60% in 2012, down from 74% in 2005, according to Greenwich Associates.
More than tech
To compete better, banks need to differentiate and boost value-added services, but it seems they remain largely focused on technology.
The industry has focused a lot of resources on upgrading technology in the last few years, but customers are now clamoring for improvement on liquidity management and short-term debt, says East & Partners’ Colquhoun, noting that satisfaction with these two products — both of which were rated as most important by CFOs and corporate treasurers — is lagging far behind.
“Banks are getting the tech and plumbing right but not the value-added bit right,” he said.
BNP Paribas says its focus is on offering clients more tightly integrated systems and flexible architectures that give customers access to real-time or near real-time data. Another key theme for the bank is integrating payments along the client’s operational value chain. To do all these things on a global level requires more investment in technology — revamping old systems as well as dealing with regulatory restrictions, BNPP's Wee explains.
Kini at Deutsche says the bank has been focused on optimising liquidity and working with CFOs to improve business processes. Another area of focus has been combining cash management with foreign exchange.
While the growth outlook for cash management in Asia remains bright, it’s clear that banks need to step up to grab and hold on to market share. McKinsey's conclusion is simple: banks need to rethink which markets they want to compete in, and then hone their strategies.