Once again, fluid conversation helps to expose the complex inner workings of banking relationships, as we convened our panel of treasury experts at this year's Association for Finance Professionals conference. Whether it be the impact of SWIFT or the shared costs of fraud, our roundtable discussion revealed the changing coordinates of treasury's world.
Business Finance: As the relationships between banks and treasury mature, how are the dynamics changing?
Jim Mahn: I think that one of the things we've seen change is that we no longer consider just banks to be our competition. We've expanded beyond just the cash management realm when we're out talking to our clients. We have to not only call on treasury but also call in other areas within the organization on a more regular basis, whether human resources, payables, etc. The knowledge base has to include the client's treasury needs as well as the business processes.
Alphonse Briand: The only thing I would add is that, over the past 12 months, one of the things that our corporate customers have been increasingly telling us is that they would value our support in helping them to access a single solution to meet both their global and U.S. domestic needs. I think that they realize that there are opportunities to create more of a seamless flow of information and to increase the automation for the payments they make outside of the United States. We see that as a trend where we can help the treasurer assimilate globalization of payment and cash processes.
David Fuller: I would add that the same thing applies domestically as well. With the introduction and proliferation of things like remote deposit, commercial card solutions, and relationships we have with others, geography is not nearly as critical. The notion that I can only bank with you if you're in my same town is a lot less of a driver than it was even 12 months ago. We've seen this with clients who are looking for a comprehensive solution that helps to address their challenges or drives overall efficiencies -- as long as they receive quality service.
Bob Pedersen: David, I couldn't agree more. We, the Postal Service, just put out a nationwide RFP for currency and check collection and processing, and the idea is just to create a competitive free-for-all, and see who wants to partner with whom. We're trying to avoid having a particular bank own a geographic area, leaving us stuck with poor service and poor pricing, to add insult to that injury.
So we're pushing forward, and I've told the bankers that what I want to do with them is to increase their risk, along with their opportunity. We don't have a resource problem dealing with 21 banks right now, but I do believe that at the end of this whole process, we will be dealing with fewer. The objective is not fewer banks per se, but to get the best that the market has to offer. And that will help me sleep better, at least for a while.
BF: Certain factors remain the same, it seems. For treasurers, access to credit remains the key consideration when allocating your business. And when it comes to banking relationships, less is more these days.
Douglas Downey: I'll just echo that credit is the ticket to our table. We're a net borrower -- we have been and also foresee that we will be. We do business with far fewer banks today than we ever have. From a corporate perspective, we're down to four banks for a $25 billion corporation, and that's a very small percentage overall from the number that are in the syndicated credit facility.
I think that from my standpoint, the interesting phenomenon that's going on is that this is probably as small as that group's going to get for our company, to mitigate that risk, or perhaps to put some more risk in a smaller group of people. To be a better customer, a bigger customer for a select fewer number of banks, and to reduce it beyond those four -- I don't know. We had to make a tough decision this year with one of our RFPs that was pretty close, and if we had gone one way, we would have had to reduce that number of banks down to three. I was not comfortable in having that small a gathering at the corporate table for some pretty significant pieces of business, so at least for me, I think that this whole phenomenon of shrinking that group of banks has probably come to an end.
Pedersen: Those who remain have better opportunity.
Downey: Absolutely, no question.
Chris LaRochelle: Consolidating our banking relationships in each country where we operate is not a focus for us right now. Strategically, we'd prefer to create efficiencies by centralizing excess cash. Iron Mountain is in somewhat of a unique position because some of our largest customers are banks. So if we were going to issue a global RFP, we would send it first to our existing group of bank customers. Additionally, we feel that consolidation at a local country level could undermine existing business relationships.
BF: Just as far as cash flow visibility is concerned, what obstacles are preventing you from gaining greater visibility into your operations?
Pedersen: I think that one of the obstacles in the way is that we do have 21 banks. It's there that the number does matter, because they're not all on the same platforms, they don't all have the same informational availability intra-day. We know how much cash is in transit in total. Cash-in-transit does me very little good, if any at all; I like to have it in my hands. I think that one of the benefits we'll get from consolidating is that we will get better knowledge regarding exactly who has how much of our cash and where. I think we'll also get better availability schedules, and we'll therefore be able to reduce the amount of cash-in-transit and increase the amount in my hands. That's one of the benefits that I think we will get from this RFP we have out.
BF: When you look into your organizations and at these relationships, where does cash visibility diminish?
LaRochelle: One reoccurring challenge we face is having to work with various internal technologies across Iron Mountain. This lack of consistency is a by-product of our rapid growth, which has largely been through acquisition. I think that in the 10 years since we've been public, we've acquired more than 200 companies. In Europe, for example, we have numerous ERP systems, and a lot of the cash is likely done on Excel spreadsheets. So our best visibility is on a monthly or quarterly basis. We're taking steps to improve this. We just recently opened an in-house bank, pulling cash as quick as possible through cash flow forecasting processes into the bank. This gives us greater visibility. But it's really an issue of consistency with our internal technology.
Craig Mondschein: I completely agree with what Chris is saying. We put in place our treasury workstation, SunGard's Quantum, which goes out and automatically polls roughly 1,400 bank accounts every day and gets our bank balances. So we have a detailed view every day of over 90 percent of our cash. Daily cash visibility is at the heart of liquidity management and validating our cash forecast.
So we've taken steps in treasury to get greater visibility into our cash around the world, for the same situation Chris is in, which is that our systems are not talking to each other on a daily basis; we're rolling up the numbers monthly, quarterly, into our accounting systems, but treasury needs to see cash balances more frequently.
Fuller: While working with corporate clients, we have observed that we're often used as the catalyst to improve this visibility across business units. We can come in and get the right people in the room and ask questions -- acting as kind of an ombudsman.
Second, we've seen more desire around alert functionality. As transactions occur at individual business units, alerts or notifications really help a centralized treasury group to know what's going on in multiple areas. So for those that don't have treasury workstations or similar automation, this push technology, or automated information delivery, offers greater visibility, such as for when a group did a wire that you need to be aware of, or you've got a wire pending to be approved.
Mahn: What we've seen is that there are requests from senior management to have visibility of 100 percent of the cash. They need to be able to see, at the push of a button, what that cash position is globally. Initiatives like SWIFT [Society for Worldwide Interbank Financial Telecommunication] for corporates are really moving us forward, getting us to a point where it can be more of a reality, but right now it's very difficult for companies to accomplish global visibility.
BF: Jim mentioned SWIFT. Can someone help to bring into context the opportunity and challenge that SWIFT presents? Perhaps we can begin on the corporate side.
Mondschein: SWIFT is going to be, in my opinion, a change in the way that companies transact with the banks. We're starting to look at SWIFT as a way to replace sending wires through individual bank electronic platforms. From a processing standpoint, I think that there'll be a lot of efficiencies.
To facilitate SWIFT processing, we envision using a piece of middleware that will allow us to take minimal data out of our ERP systems, convert it into SWIFT format, and send SWIFT payments out the door. The control point for those SWIFT payments will be in treasury. A processing control enhancement will require all payments to be initiated in an ERP system and will not allow one-off payments.
Sending all wire payments through SWIFT and having the payments initiate in an ERP system (and not be entered directly into a banking system) will also allow for more efficient tracking of indirect spend.
Our proposed SWIFT solution also allows for increased straight-through processing. The payments will come out of the ERP systems, through the middleware, and out to SWIFT, as opposed to having to have someone rekey the information into our bank software.
Briand: I do think that SWIFT is a great development in terms of how it can support our ability to serve global corporates. The Bank of New York Mellon has been a major payments and trade bank for a long time, and we have been very active in SWIFT. There is an opportunity to bring consistency and transparency to the information flows between corporates and the banks. The infrastructure is there. The standardization is there. The security and risk mitigation are there. So really, the table is set for global corporates to leverage this platform, and I think that banks -- major banks -- are anxious to use it to service corporates around the globe.
Part of the issue comes back to our first conversation. Corporates use multiple banks -- but not all banks here in the United States are members of SWIFT, nor are they all up to speed with some of the nuances and abilities to leverage it. So it's going to be a challenge to get to that 100 percent goal or consistency in terms of using SWIFT as a vehicle from the corporates' point of view. But I think that's the trend, and it certainly helps us to get to a new level of efficiency and partnership in the corporate and bank relationship.
Interestingly, about eight or nine years ago SWIFT banks voted on whether to allow corporate access. I think that something to the tune of 15 percent voted in favor of it. Last year, the same issue carried 98 or 99 percent of the votes. So banks obviously think that the time has come, and it's going to be a valuable vehicle going forward.
Mondschein: Right … it's going to also bring technology changes to the banks. For example, once Honeywell becomes a corporate member of SWIFT, there is a pricing differential on sending a domestic payment versus an international payment. We are going to use a U.S. SWIFT code to identify our company. When I want to send funds from our account at JPMorgan Chase in China, I want to be able to send that payment to JPMorgan Chase in New York and have them internally route it to JPMorgan Chase in China, which from SWIFT's perspective is a domestic payment, which costs less.
I do believe that only the largest global banks are going to be able to provide that service, and if they cannot provide that service today, the banks are going to have to invest in technology that will allow them to do so in the future.
Mahn: I think that as products evolve, it brings solutions down-market, making all of these things that we're talking about less around customization and more around standardization. I think that the more we move toward standardization, the more we are able to bring technology to a wider range of companies so that the smaller company that may have limited time or resources can gain access into technology when it's available.
Fuller: I think that this is the point. Traditionally in treasury management, we may see products or approaches start at large companies, and they migrate down to smaller companies. Or then we've had other things that start in small business and migrate up. But I think that the interesting thing about this approach with SWIFT will be to see what applicability there is down-market. What efficiency plays are there down-market? This is not just this new functionality, but it's another way to have it drive efficiency into the business.
The example where there are four people on a treasury staff is what we hear consistently: "I've got this group of people with innovative ideas, but I'm either constrained in terms of the number of resources I have, the number of priorities I can manage at the same time, or internal technology demands." So it's evaluating and prioritizing these things on the corporate side to say, "Everything aligns now; this makes sense for me to do." For this application, I think it's very much one of wait-and-see for the middle market and upper middle market companies -- to see how it does apply to their businesses and what they can gain from it. It may make all the sense in the world for the Fortune X-hundred company, but what about for my company? So it will be interesting to watch how that evolves over time.
BF: We wanted to touch upon fraud and find out if there are new ways in which your banking relationships are being leveraged to fight it …
Mondschein: Fraud is not going away. Fraud is going to continue -- it's very profitable.
So what can we do to mitigate the risk? Every-place around the world that we can, we put in positive pay with payee match, so that when a check clears, the bank is verifying not only the amount and the check number, but also to whom the check was made payable.
As you look toward Europe, with the SEPA initiative, the banks have to develop direct debitblocking mechanisms, such as we have here on ACH debit blocks. This for us is a very large issue. When the European Payments Council originally came up with SEPA and decided to allow direct debit, as is allowed in many European countries today, the potential for debit fraud increased.
Direct debit a great way to allow certain vendors to come in and take money directly from your bank account, just like an ACH debit in the United States. However, proper controls need to be in place to make sure that they are legitimate payments. The banks in the SEPA zone are developing these fraud prevention measures as we speak in preparation for full implementation of SEPA.
In short, both corporates and our bankers need to be sure that safeguards are in place to protect our most liquid asset, which is cash.
Pedersen: I should mention that we do have our own inspection service -- the guns and the badges. And they're regularly working with Customs and intercepting packages that are arriving from elsewhere that contain fraudulent documents. I think that because historically we have the guns and the badges, and it's a federal offense to mess with us, we have almost no card fraud in the card-present, face-to-face transactions at our counter. However, at our kiosks and over the Internet, you don't have to be face-to-face with anybody, and that's where some fraudsters are trying to get free postage. We started accepting cards in '95, we created a permanent unit around card acceptance in '97, and just within the past year or so we have started having somebody now working pretty much full-time on antifraud.
And the thing that bothers me the most is that I have no idea how big fraud can get on the Internet. And the nature of it has changed a lot faster. We've once again seen the technology move ahead of our ability to command it and harness it well. I could not have talked to you a little over a decade ago about somebody sitting in another country, for example, and trying to commit this kind of fraud against the Postal Service, because the electronic means were not there.
But now you've got folks who could be sitting anywhere trying to defraud any company, through phishing schemes, through hacking attempts, through reshipping schemes that target retailers -- the list goes on and on. And they're sitting in the relative safety of these other countries where we can't get to them easily. And this really bothers me, because like Craig I don't see it going away. I see it getting bigger rather than smaller.
Downey: When I'm asked how I allocate my time, and discern the percentage of time that I spend on risk management related to fraud, people are amazed. Now, there are a number of other things, but fraud is a big piece of it. The thing that troubles me on any given day about fraud is the secondary consequen-ces -- the ramifications to us as corporates, despite doing everything right.
We take advantage of payee-matched positive pay. We take advantage of ACH debit blocks and filters. We do everything right. We reconcile in a timely manner. We secure check stock. We have multiple signatures on manual checks. We do all of those things right. But when a bogus check makes the front page of a newspaper in a market where we have hospitals, and division presidents start calling, asking how to address the PR and the integrity issues, to me there's a snowball effect. Not necessarily that there's more check fraud or less check fraud, or more debit fraud or less debit fraud. To me, that's the bigger issue that's coming to the forefront.
Mahn: We as banks are required to have more frank discussions with our clients like we have with the issue of fraud. I think that what's changed over the past year is that customers used to be more reluctant to open the door and to really let us in to get to know their operations. I think that with all that is going on, we have to have trust between the two organizations. There has to be an evolution in the relationship. It's not just one pushing on the other, it's working together.
Briand: One other perspective from an industry point of view is that we've been working across the different payment channels to apply best practices to fraud prevention. We know that the fraudsters are never going to give up; they're just looking for the weakest link. As an industry, we are looking across payment types -- check and ACH and card -- to identify and implement common best practices. We are seeking a unified approach across all of these different payment channels.
BF: We hear quite a bit about some of the innovative technologies helping to advance banking relationships, but does technology really play a key role in determining where treasurers ultimately allocate their business?
Pedersen: I think that each of the banks will tell you that they've got unique solutions. It's not that we've reached the point of being able to buy identical widgets from everyone, but you do see a lot of folks offering similar things, and of course they all give it their own brand name. In the past, it was kind of a frustration of mine that we did not have enough people engaging us in thoughtful dialogue. Instead, I had some people trying to sell me solutions to problems I didn't really have. This has changed, and I'm very pleased with the how it has changed. I don't want to lose that as we go forward.
Downey: Bob, regarding that consultative approach -- have you found that it's driven more by the longevity of the people in those banks, or strictly by the longevity of the relationship itself? Can you differentiate? Because I'll say to you that my people that I go to are driven by the longevity of the people within the relationship, even though that organizational relationship has been there a long time. If the people change, sometimes that confidence can disappear.
Pedersen: You're right, Doug. We learned quite a lesson in the late '90s. We were overreliant on a particular relationship manager and he went to do other things within the bank, and we literally didn't know whom to call. We are never, ever going to let that happen again. We are going wide and we are going deep, and we get to know a number of people, get engagement from senior managers, so that there's always somebody to call. When they move the chairs around and different people move on and all the rest of that, we won't be stuck having to put all of our eggs in one basket. We've taken sort of a risk management approach to make it both: We want the longevity to work for us, but we don't want to be overreliant on a particular individual, because things change.