Our series “The cash management journey”continues and after our last article on bank fee analysis we would like to follow up with another in-depth topic. In this article we will propose a banking strategy with various criteria for two different client profiles, because this will form the basis of further decisions towards an effective treasury management.

Times of crisis lead to tension in the financing world. Both the COVID-19 pandemic and the situation in Ukraine have posed many a challenge for CFOs, treasurers and financial service providers. The relationship of companies with banks, which rely on a quick and flexible response from banks in times of falling sales, has been put to the test. Especially core banks with which long-term business relationships exist have proven their worth, as finding a new bank when in financial difficulties is almost impossible. As a result, many companies are now reassessing their banking strategy and identifying which banks are suitable for this purpose. In doing so, particular focus is being placed on, among other things, the banks' competitiveness in their coverage of different regions and countries, as well as on modern cash management. Digitalization and automation in particular have given rise to modern cash management functionalities for coordinating the payment flows of cash and cash equivalents. Here, the key is the interplay between a sound banking strategy and the matching selection of systems.

Selecting banks with a specific goal in mind

A number of factors should be taken into account when it comes to picking the right bank. The ultimate aim is to process day-to-day transactions securely and quickly while keeping costs as low as possible. One way to achieve this is to choose a group of banks that are homogeneous – this saves transaction time.

Apart from that, what criteria should be taken into account? There now exist various options and instruments that should be looked at more closely. To this end, by way of example, we will describe two companies to show that depending on the company’s setup, a different bank and/or services might prove to be the right choice. Let's look at a fictitious company A, a medium-sized limited liability company headquartered in Germany with only three national subsidiaries, and company B, which operates internationally and has several subsidiaries abroad, and we see the following differences in banking strategy: 

Company A will focus on basic functionalities that can be met at low cost. Its requirements consist of favorable conditions, an e-banking platform and a direct, personal communication channel with the bank. Company A's requirements can be met by one or two regional or even larger national banks.

Company B, on the other hand, cares about the following functions that the bank should offer:

The fundamental prerequisite has to be the widest possible coverage of the various countries, so that the subsidiaries' accounts only need to be held at a small number of banks. This in turn enables physical or virtual cash pooling by the bank, resulting in higher liquidity and reduced expenses. To reduce the number of accounts, the use of payments on behalf of as well as collections on behalf of might also be used. Having a powerful and versatile e-banking platform would also prove useful for the company. Company B's requirements typically can only be met by large banks with an international presence, which can narrow down the choice considerably from the outset.

Historically, most companies have maintained regional bank accounts, so the larger the company, the greater the number of different banking relationships. A bank strategy aims at reducing the number of banks and bank accounts so as to cut down on the complexity of the underlying cash management processes. To this end, it is valuable to draft a target vision, i.e. to prioritize the bank selection criteria Such a catalog covers numerous criteria and details, for instance:

  • Connectivity options and functions
  • National and regional presence
  • Cash-pooling functions
  • Interfacing and formats
  • Account opening and closing processes (eBAM)
  • Security
  • Integration
  • Service levels
  • Implementation options
  • Competitive B2B terms

Equally important as the selected strategy are the opportunities that arise from the use of modern systems in cash management.

Designing systems the right way – from the account interface to communication to cash pooling

Once the bank(s) has been selected, it is time to address the issue of how to map your banking strategy within the company. The objective is to maximize the benefits and simplify day-to-day liquidity planning and control. But what exactly does this mean for the system and software requirements within the company?

Bank account management should be designed to provide optimum support for master data maintenance, for example, by providing workflows for account creation as well as a document management system for logging the opening and closing of bank accounts and for storing the names of authorized signatories. Linking the bank account with the accounting account and providing for an appropriate account logic conveniently simplifies the user's daily work, thus increasing efficiency and transparency.

Likewise, the bank interface also depends on the respective system. Many cash management systems can be interfaced with banks via EBICS, host-to-host, SWIFT, etc. for electronic payment transactions. This exchange of data also makes it possible to receive or send account statements, earmarked items, logs, bank fee statements as well as account opening documents. Without a system interface or in case of a system discontinuity, the supplied files cannot be used in an automated manner - for example, for bank fee analysis or electronic account opening. This would also hamper both monitoring and standardized payment transactions. 

Sophisticated cash management solutions also provide the option of system-controlled cash pooling. This means that accounts at different banks can be pooled among each other. While direct pooling with a bank would be preferable, it may well be supplemented by "manual" or self-managed pooling if there is sufficient system support. It goes without saying that this process must be monitored appropriately. It should be possible to have an overview of the liquidity of all accounts at group and company level in one system.

Our conclusion

An effective banking strategy starts with choosing the right bank(s), followed by a suitable cash management and cash pooling strategy as well as IT support, and ends with adequate reporting. All in all, the following intermediate steps should be taken into account:

  1. Preparing a weighted set of criteria that reflects the company's structure. 
  2. Matching eligible bank(s) capable of meeting the selected criteria.
  3. Selecting the bank(s).
  4. Choosing the system: Developing a suitable system landscape that can technically map the criteria (from item 1 as well as reporting options) with the fewest possible system discontinuity.
  5. Designing the day-to-day operations in cash management for optimal control and transparency

Source: KPMG Corporate Treasury News, Edition 127, November 2022
Börries Többens, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Nadine Hauptmann, Managerin, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG