Cash management
Rethinking
how to manage
international
payments
34 Financial Services Research Q4 2011
Jesper Linden, Offering Manager, GTS Banks at SEB , talks to
Bob Currie about how his team is helping financial institutions
to redesign their international cash management arrangements
The global financial crisis and recent turmoil in the eurozone have dictated that financial institutions and corporates
continue to manage their international payments activity in
an atmosphere of uncertainty. In this environment, treasurers are under pressure to optimise the efficiency of their
liquidity management and to reinforce the risk management sitting around this process. In a volatile economic
climate, issues of security and liquidity remain crucial. Are
companies holding their cash somewhere safe? And can
they access these cash balances promptly when required?
Moreover, cash optimisation becomes particularly important. Some companies have accumulated significant piles of
cash – and in the current low interest rate environment it
is valuable to optimise yield on cash balances at acceptable
levels of risk.
Against this backdrop the need for a strong partner to
support cash management activities and to manage the
change agenda is essential. As Offering Manager for GTS
Banks, Jesper Linden leads a team responsible for providing
an integrated view on the transaction banking needs of the
bank client segment (including custody, clearing and cash
management). From a cash management perspective, this
will involve providing integrated service delivery across clients’ full cash management needs: they are not interested
in buying separately across different types of international
payments or account structures. The client is wishing to buy
a joined up service across each of these cash management
products.
Managing change
With policy makers and financial authorities driving a
constant stream of regulatory reform, cash managers are
running hard to adapt to changing rules and refinements to
the payments infrastructure. In helping clients to manage
Cash management
this change agenda, Jesper Linden highlights two development areas that sit at the
heart of SEB’s cash management strategy
for the banking segment. The first centres
on cash clearing and liquidity provision,
embracing SEB’s traditional inter-bank
cash management business. The second is
delivery of a white-label services product,
enabling foreign banks to link to the local
payments infrastructure via SEB as account
operator, thereby operating in SEB’s home
markets as if they are domestic banks.
Though the traditional cash clearing service
is a relatively mature product that SEB has
offered for many years, the prevailing instabilities in global financial services dictate
that banks are attaching huge importance
to ensuring that their liquidity is managed
in a secure and efficient environment. In
facilitating this process, SEB is focused on
improving cash visibility, cash mobility and
in enhancing optimisation tools that are
available to its client base.
In managing these diverse client needs, SEB
is working with transaction and cash management specialist Gresham C
omputing.
Financial institutions may have payment
arrangements in place with 50 or 100 provider banks (and there may be multiples of
account with each provider), many of which
may employ slightly differing system capa-
Cash mobility is fundamental in enabling
SEB’s customers to discharge their payment
obligations. Clients must verify that they
have funds available in the right place and
that they have control over which payments
go out first. SEB offers advanced sweep
functionality which allows funds to be allocated to where these are most needed. In a
number of markets, it also has the ability to
time stamp outbound payments such that
they will be held on the account until these
need to be paid. To maximise efficiency
across this process, effective cash optimisation is important to ensure that any funds
remaining in the account end of day can
be swept into high-yielding accounts in line
with the client’s preferred risk appetite.
FSR asked Jesper Linden how the economic
climate has shaped clients’ demand for cash
optimisation in the face of this existing low
interest rate environment. For example in
the UK, FSA Client Asset rules stipulate
that English banks may not hold more than
a specified percentage (currently 20 per
cent) of their clients’ cash deposits in their
own books. The balance must be held in
the books of other banking institutions. As
a result, banks are setting in place deposit
arrangements with multiple banking counterparts. “Given the strong credit rating of
SEB as a bank and the fact that the Nordic
markets ex Finland are comparatively well
insulated from the euro, this has contributed to strong cash relationships between
SEB and a number of UK-based banks,”
explains Linden. “But, inevitably, client
banks are seeking attractive yield on the
cash balances involved. SEB has developed
Financial Services Research Q4 2011 35
In the cash visibility area, banks are seeking
close control of their counterparty exposures – including the ability to monitor open
position exposures in real time, to mitigate
key risks across these exposures and to
meet the delivery commitments created
by these payment obligations. To facilitate
this process, SEB continues to enhance its
reporting capability in line with the variegated needs of its clients. Some may wish
to receive SWIFT-based reporting intraday,
receiving MT942s that confirm transactions
they have received during the past 30 or 60
minutes. Others may ask SEB to pre-advise
them on outstanding payments and to inform them if any anticipated payments have
not completed as expected. Many clients
may wish to monitor cash balances and
open positions via a Web-based portal. SEB
provides flexibility to accommodate each of
these client preferences.
bilities and message formats even within
the SWIFT standards. Gresham Computing
has helped SEB to manage these operational complexities, standing as an interoperability hub. Clareti Cash Reporting (CCR)
will take in messages in a diverse array of
format, it will cleanse and standardise this
message information such that it can be
forwarded to the recipient in a standard
message format such as ISO 20022 XML
or presented in a consolidated manner
through an online portal. As a result, SEB is
able to deliver a consolidated real-time view
of transactions across a client bank’s network of correspondent banking partners.
Cash management
a range of flexible interest rate models –
offering a tiered interest rate based on the
inter-bank base rate plus a margin for banks
with sizeable cash balances on deposit –
and interest-netting facilities.”
White label services
36 Financial Services Research Q4 2011
In parallel with these commitments, SEB
continues to invest in the development
of its white labelled services – named
‘network-managed payment services’ or
‘re-account models’ by some banking
institutions. “Traditionally when banks
have wanted to support the international
payments activity of customers in markets
in which they do not have a presence, typically they have referred this business on to
a cash correspondent partner with specialist
expertise in the local market,” says Linden.
“But for a number of banks’ key clients,
such referral arrangements may no longer
suffice. Their global payments needs require
the same level of operational efficiency and
cost efficiency as their domestic payments
and they are reviewing their international
payments arrangements to move them
closer to this goal.”
In supporting this demand, SEB has been
working closely with a number of global
banking institutions as they review the
structure of their international payments
networks. In some locations, these clients
may have their own bank branches and
will meet clients’ payments needs through
their own cash clearing capability. But in
other locations this approach may not be
practical. In the Nordic markets, a number
of financial institutions now employ SEB’s
payments architecture on a white-labelled
basis to service their Nordic payments activity, providing access to the domestic cash
clearing infrastructure and extending local
currency accounts to international clients
as if they are using a domestic bank. For
instance, HSBC has announced a partnership arrangement with SEB through which
SEB will provide access to local payments
clearing systems on HSBC’s behalf. Through
this arrangement, the HSBC customer
will (for example) have an SEK account in
London that will be directly connected to
the Swedish infrastructure to support domestic cash payments. However, it will be
supported by HSBC relationship manage-
ment staff and it will manage its payments
activity via the same client interface and
delivery model employed by HSBC in other
markets worldwide. This partnership arrangement offers the additional benefit that
it will accelerate procedures for account
opening, potentially shortening the time
taken for completing new account agreements in the Nordic markets from several
weeks down to 2-3 days.
SEB established its first client under these
arrangements approximately 10 years ago.
“For a number of years we saw limited
activity for this product, but during the past
2-3 years a number of banks have made a
strategic choice to restructure their international cash management arrangements,”
says Linden. “It is challenging for a US or
an Asia-Pacific based bank to know how to
support efficient cash management services
across the Nordic markets – it takes time
to build this expertise and to establish an
efficient cash management infrastructure.”
Recently, SEB launched its Multi-currency
Direct Debit Service, enabling SEB’s financial
institution clients to access direct debit
schemes in the Danish, Norwegian and
Swedish markets. As a Nordic cash management specialist, SEB is able to insulate the
client from the complexity of managing
each DD scheme individually. “For clients
using the SEPA direct debit payments
system, for instance, we can take in instructions in ISO 20022 XML format and convert
this into the proprietary formats employed
by each of the three Scandinavian payments clearing houses, thus enabling these
customers to re-use the developments
that they have done to process SEPA direct
debits,” says Linden.
Financial institutions are seeking an alternative to fragmented local correspondent
banking relationships and many are attempting to establish a smaller number of
centralised regional solutions to meet the
cross-border payment requirements of their
customers. SEB has established a sophisticated white-label offering for the Nordic
markets and is well placed to fulfil the
needs of international customers seeking
to meet their global coverage through this
type of regionalised payments and cash
management solution.