Evolving Role of Banks in Corporate Banking
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28 November 2013Robert Mancini
Commercial banks play a vital role in the financial system among; facilitating borrowing and lending for corporate clients to optimize their funds, provide specialized financial services to enable efficiency in transactions, and much more. Now imagine a world without banks. Corporations (excluding retail in this blog) would struggle to borrow money, spend much time seeking for savings options, and most likely increase their overall financial risks. Few can argue that all banks, large to small, bring much value to the financial system. And I agree. In this world without banks, corporations would need to leverage alternatives for borrowing in order to meet financial obligations and fund growth opportunities. Can you imagine such a scenario? This is in fact what many corporations have been facing over the last few years. Banks have reduced credit even to good businesses not because they want to but because they need to. Banks suffer balance sheet impairments arising from the financial crisis and have been forced to reduce the loan supply. So how have corporations reacted to this changing environment? Has the role banks play to corporate clients changed? Are corporate clients turning to their bank for strategic support and/or guidance? What can we anticipate corporations to do in the future regarding their bank relationships? Many good questions and the answers are in some cases multiple, others developing, and some uncertain or evolving. Where is the nucleus of the pain for corporates? I think it is in two main areas: 1. Seek funding for major capital investment such as M&A, and 2. Require funding to support growth opportunities (e.g. fund trade activity with increasingly foreign markets on goods) I will address on the latter point as this has been a more focused discussion topic for me with banks, vendors, and corporates. Aside from bonds, large corporates have been leveraging internal sources for funding. For specifically, corporate clients have been ‘smarter’ about their usage of cash and leveraging technology to make decisions on borrowing and investment. The number one priority where technology is an increasing contributor is liquidity to trade cash visibility and cash flow needs. Visibility is the key and it’s not just about today but t+5, etc. Corporates are moving beyond the intra-day cash management challenges and tackling investment decisions based on complex models. For example, if currency X hits this target and account balance is a minimum of Y, then perform Z. In sum, liquidity and trade and much more tied to the hip than before thanks to technology. This is also helping banks make better decisions on corporate lending across the entire visibility of accounts and relationship portfolio. Technology is also helping corporate clients have better analytics and integration to systems like ERPs, but this makes for a longer discussion. As the regulatory environment continues to put challenges on the players in the financial industry, the key players are finding ways to leverage technology to alleviate the pain and make good on growth opportunities. So what does this mean to the bank and corporate relationship in the future? I think technology and operating agility will evolve to strengthen the role of banks within the industry to enable corporate clients manage to STP processing while taking advantage of growth opportunities in the global marketplace.