Negative interest rates and upheaval among providers of essential cash management systems have propelled cash and liquidity management to top priority for large European companies.
This new focus reflects the negative interest-rate policies of the European Central Bank and other national central banks that seem certain to persist for the foreseeable future and possibly become even more aggressive.
In a new report released today by Greenwich Associates, Amid Negative Rates and Bank Turmoil, Cash Management is Key Challenge for European Companies, many of the 2,585 European corporate financial officers they spoke with say they are focused on both the efficient use of positive cash balances and general security of their cash.
From 2014 to 2015, European companies’ surplus cash held by banks or cash management providers declined to two-thirds from 69%. Meanwhile, the share of surplus cash used to fund M&A opportunities crept up to 3% from 2%, and the amount to fund dividend payments to shareholders increased to 5% from 2%.
“We expect these trends to continue and for more companies to direct cash holdings to more productive uses like dividends, share buybacks and M&A for as long as negative interest rates persist,” says Greenwich Associates Managing Director Dr. Tobias Miarka. “We also expect companies to be more receptive to overtures from non-bank providers that can help them make better use of surplus cash.”
Bank Retrenchment Disrupts Cash Management Industry
Negative interest rates are only the latest challenge to confront Europe’s big banks, and the travails of the banking industry are now spilling over into the corporate treasury management function.
In particular, one in five of the companies Greenwich Associates spoke with named switching cash management providers as a top issue faced by their treasury departments.
“This level of turnover is virtually unprecedented,” explains Greenwich Associates consultant Melanie Casalis. “Changing cash management providers and systems is painful from operational, technical, risk, compliance, legal, and costs perspectives. As a result, companies rarely switch, and instead, try to work with existing providers to incrementally improve the cash management process.”
Companies seeking new cash management providers are gravitating to banks with robust international platforms that can meet the needs of cross-border and overseas businesses. Among the biggest winners have been BNP Paribas, Citi and HSBC.
Companies Centralize, Automate and Streamline Treasury Operations
In addition to rationalizing their bank relationships, many large European companies are also executing aggressive plans to reduce costs by centralizing treasury departments, upgrading technology and rationalizing their bank relationships.
Currently 47% of corporates operate shared service centers for treasury operations. This centralization is viewed as a priority and helps companies cut operational costs as many corporates plan technology infrastructure improvements as well as to switch treasury management systems (TMS).
Finally, companies are seeing opportunities to cut costs by reducing the number of banks they utilize for cash management and other services. The average number of cash management providers used by large European companies dropped from 5.0 in 2014 to 4.6 in 2015.