Closing the Gap Between Bank Cash Management Offerings and Corporate g g p

Customer Needs

Christine BarryResearch DirectorAite Group

Sherri BazanCash ManagerAT&T

Michael BerkowitzManaging DirectorCiti

Aite Group PerspectiveChristine Barry

ConsultantAite Group

2

The economic crisis brought with it a paradigm shift, creating new market

expectations for financial transparency and the need for a new type of relationshipthe need for a new type of relationship between banks and their customers.

3

Knowledge is Power…The organizations that most effectively weathered the economic crisis were those with access to timely, accurate and usable information.

Corporate Ability to Gather Data During the Crisis. (Annual revenues less than US$1

billion )

Corporate Ability to Gather Data During the Crisis. (Annual revenues greater than US$1

billion )

Were able to gather Were able

Struggled to gather dto gather

data as needed

10%

Struggled to gather data as needed

90%

Were able to gather data as needed

65%

data as needed

35%

Source: Aite Group

4

Access to DataA lack of necessary technology and multiple bank relationships made access to data difficult for many corporates.

Q With how many banks around the globe does your

15 to 199%

Q. With how many banks around the globe does your organization do business? (n=35)

10 to 1423%

20 to 2411%

25 to 4920%More than 20

51%

5 to 9

More than 5020%

51%

Fewer than 56%

11%

Source: Aite Group Large Corporate Survey, June-August 2008

5

Corporate Information-Gathering Processes

Cash and Liquidity • Global Cash Balances• Short Term Investmentsq y

Visibility • Cash Forecasting Data (i.e. Sales, A/P, A/R, etc.)

Risk Factors• Counterparty Stability• Supply-chain/ channel partner• Foreign Exchange

Working Capital Automation

• Receivables Reconciliations• Payables Outstanding and Timing• Order-to-cash cycle

Source: Aite Group

6

The Crisis: a near disasterApproximately one-third of Top 100 U.S. banks viewed the crisis as a “near disaster” for their institution.

Experience of the Economic Crisis for U.S. Banks' Treasury Services Business

(Percentages in Each Category Of Top 100 U.S. Banks)

Mostly non-event

Near disaster banks33%

banks67%

7

Cross-Selling

“Non-event” banks have seen new opportunities to cross-sell products to customers.

Customers are showing greater interest in:

• Fraud prevention tools

• More advanced liquidity/cash management tools

• Receivables management

• Payables management

Approximately 80% of the top 50 banks plan to invest in working capital products and services

8

The Importance of Technology

Going forward, technology will be critical to future bank success.

Conservative Business Practices

Technology

Accessible Data and

Information

Strong Product

Offerings

9

Cash Management & Treasury Systems

Some banks are finding they need to invest in new cash management/treasury systems.

Q. Within your discretionary budget, how high are your expenses for cash management/treasury

systems over the next 24 months? (n=40 large North American CIOs)

25%High

American CIOs)

g

35%Moderate

10

Bank Response to Corporate Treasury Needs

Bank offerings must respond to the more strategic needs of corporate treasurers.

• Customer-driven dashboards

• Consolidated information and multibank reporting

• More strategic tools for better liquidity management

• More granular entitlements

f• Real-time information

• Tighter integration for remote deposit

• Single portal and entry point to commercial servicesSingle portal and entry point to commercial services

11

Treasury and Forecasting

These treasurers require greater forecasting tools

• Forecasting:– is currently one of the

least efficient

Q. On a scale of 1 (not at all likely) to 5 (definitely likely), how likely is your institution to offer its cash

management customers cash flow forecasting tools over th t 24 th ? ( 15)least efficient

processes– It has a high

dependence on excel spreadsheets

the next 24 months? (n=15)

27%Very likely tospreadsheets

– Is in need of greater automation

• Does not elicit a clear d i bilit b t ff i

27%definitely likely

desirability about offering forecasting capabilities

13%Already offer it

12

Aite Group’s Survey of 15 of the 50 Largest U.S. Banks

Aligning Offerings with Client NeedsLines of business are being restructured to ensure product and service offerings better align with client needs.

• Cash management has been replaced by treasury management at the 10 largest banks

• Silos are coming down as the industry sees greater convergence ofgreater convergence of cash management, foreign exchange and trade finance

13

Aite Group’s Survey of 15 of the 50 Largest U.S. Banks

Globalization and International CapabilitiesGlobalization is moving down market and middle market customers are now also requiring more international capabilities.

Q Whi h f h f ll i b d ib h i fQ. Which of the following best describes the importance of international services to your treasury services strategy over

the next two years? (n=21)

Holding constant

24%

Growing in importance

76%

S Ait G ’ S f T P f i l t T 100 N th A i B k J 2009

14

Source: Aite Group’s Survey of Treasury Professionals at Top 100 North American Banks, January 2009

Middle Market Business ExpansionIn the U.S., middle market companies increasingly have trading partners abroad and want to be able to view overseas account information.

Q. "Do you have suppliers outside of the United States?"

n=200

Q. "How important is it for your business to be able to view consolidated domestic and

overseas account information?"n=200

60%No 24%Very

Important

40%Yes52%

24%

N t I t t

SomewhatImportant

So rce: Aite Gro p’s Middle Market S r e

52%Not Important

15

Source: Aite Group’s Middle Market Survey

Bank Integration

Banks are also focusing on tighter integration with customer systems.

• Approximately three

Q. On a scale of 1 (not at all important) to 5 (extremely important), how important is it to your bank's largest corporate customers that your bank be able to offer

straight-through processing (connect directly to their ERP )? ( 15) quarters of middle

market companies have ERP systems.

• Banks should work

ERP systems)? (n=15)Not at all

important to moderately

important, 13%

Extremely important, 20%

• Banks should work with technology vendors and providers such as SWIFTSWIFT

Very important, 67%

16

Aite Group’s Survey of 15 of the 50 Largest U.S. Banks

Client Experience

Increased emphasis is being placed on the client experience.

• 65% of large corporates feel theirNo

Q. Have you ever switched financial service providers as a result of poor customer service?

(n=34)

corporates feel their banks do a poor job of cross-selling products and understanding their

No24%

understanding their needs

• 40% are less likely to send out an RFP if Yescustomer service is excellent

Yes76%

17

Source: Aite Group Large Corporate Survey, June-August 2008

Portal Strategies

Satisfaction will grow as banks move forward with portal strategies…

• Single point of login and single location to manage entitlements12%

Percentage of U.S. Banks Deploying a Next-Generation Treasury Services Customer

Portal manage entitlements

• Single entry to all commercial capabilities

12%

p

• Web 2.0 and customer driven environment

G t lli1%

5%

• Greater cross-selling ability2009 e2010 e2012

18

Other Strategies

Other important strategies bank should employ as they better segment their customers.

• Identify key industry verticals and needs-based segments

C t t b dl f t i d i• Create segment bundles for a more customized experience

• Offer dynamic pricing• Position your institution as a trusted advisor by offering morePosition your institution as a trusted advisor by offering more

to each segment than transactions

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Final thoughts

Takeaways

1 Liquidity Management • Customers need better liquidity management tools If banks don’t offer them they will go elsewhere1. Liquidity Management • Customers need better liquidity management tools. If banks don t offer them, they will go elsewhere.

2. Trickle Down Globalization • The need for global capabilities is moving further down market. Even those banks not serving large corporates need to enhance their international capabilities.

3. Technological Investments • As budgets remain tight, ensure that you are getting the greatest return from your technology investments.

4. Cost Reduction • Customers will increasingly be relying on their banks to help them drive out costs. Make sure your g y y g p yinstitution is armed with the right tools.

5. Portal Strategy • Eliminate silos and migrate toward a portal strategy.

6. Business Relationships • Banks must shift from transaction providers to strategic partners

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Corporate PerspectiveSherri Bazan

Cash ManagerAT&T

21

The Corporate Perspective

AT&T has implemented a series of treasury initiatives over the past 2 years.

Single IBAN Redirection Solution

• Notional Pooling solution with Citibank allowing greater control, simplicity, and efficiency in handling AT&T’s multi national client’s bill payments

Checks to Electronic

• AT&T currently converts 69% of all checks to ARC

Counterparty Risk •Weekly counterparty risk evaluations with its banks

Future Improvements

• Electronic Bank Account Management• Same Day ACH

22

Single IBAN Redirection SolutionBanking Solution that re-directs funds to underlying sub- accounts in various foreign currencies and then sweeps them to a US dollar account eliminating thousands of monthly fix and funds transfer transactions through the utilization of a notional pool linked to a single IBAN account.

Notional USD:• Investment• CP

VendorGBP

VendorEUR

Vendor USD

VendorILS

Vendor BND

VendorKRW

VendorTWD

Disbursement Currency

Multi-Currency Notional Pool: Calculates, notionally, the entire pool balances across currencies in 1 base currency: USD for AT&T.

Worldlink or FX Desk for CCY ChangeNon-

pooling currencies

EURaccount

GBPaccount London

USDaccount

International Collections: Single Account – XXXXXX with designated IBANBND KRW TWD USD Billing Currency

currencies. ILS, SKK,

Automatic Account Redirection

Customer GBP

Customer USD

GBP EUR USD

Customer ILS

ILSAccount • Checks • ACH’s

Currency

In-Country Collections International C ll ti /L d

N.A. Collections

Customer EUR

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Collections/London

Checks to Electronic

AT&T currently converts 69% of all checks to ARC (14M items per month).

Banks Develop a more b t i l i

Check Clearing Timeline

AT&T implements ICL (Image Cash

Letters)

robust image clearing exchange allowing ICL items to clear without

utilizing IRDs

AT&T begins utilizing ARC

•However, half of the checks were being converted to an IRDs

June 2010

• Becomes a break-even situation

•AT&T foresees an increase

2009-20102006

•The cost of conversion was higher than processing a regular check for AT&T

•AT&T foresees an increase in check clearing costs and continues use of ICL

• Typically 2 day items become 1 day items

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Counterparty Risk

AT&T has implemented weekly counterparty risk evaluations with its banks.

• Treasury produces weekly reports showing:– Balances by Institution– Bank Balances by Institution Tier 1 Capital Levels – Bank Credit Rating information

• Weekly risk evaluation causes AT&T to arrange treasury operations to stay within required limits.

• Going over the limit causes a report to the Board of Directors Audit Committee

25

Future Improvements

Other important strategies bank should employ to better service their customers.

• Electronic Bank Account Management - the ability to electronically open and close bank accounts, change services

d h dd f ll b k ld l d t i dand change addresses for all banks would lead to increased productivity

• Same Day ACH - This application would improve availability. It ld i thi ki h iti i thi ld ff twould require rethinking cash positioning as this would affect

ARC items. One major positive is the potential to receive same day returns.

26

Bank Perspective: Corporate Customer Needs and Bank Cash

Management OfferingsMichael BerkowitzManaging Director

Citi

27

Industry Trends and Initiatives

Trends /Corporate Needs Initiatives /Bank Offerings

• Tools for Integration and

Trends /Corporate Needs Initiatives /Bank Offerings

• Globalization and Business gCentralized Treasury

• Paper to Electronic Initiatives

Expansion

• Budget Expense Pressure

• New Cash Visibility Tools and Investment Offerings

• Financial Crisis, Regulatory Changes and Interest Rate Environment

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Globalization and Business Growth

Bank treasury management solutions need to keep pace with increasing corporate globalization.

Obstacles to Growth Why

1. Establish Appropriate Levels of Liquidity

• Looking forward, strong organic cash generation and liquidity positions will set apart firms that are fueled for growth driven by capital investments anddriven by capital investments and acquisitions.

2. Releasing Trapped Liquidity

• Companies with extensive operations in emerging markets with capital controls, such as China or Brazil, face continued pressure to get greater value from cashat

ion

Sco

re

pressure to get greater value from cash trapped in these markets

3. Integrating Global Treasury Processes

• Centralization of treasury provides a “single” view of firm wide liquidity and risk which. Useful for managing FX, interest Rate and Counterparty Risks

KO

F G

loba

liz

4. Investing in Technology

• To improve processes and procedures to more efficiently connect networks of operating centers.Year

Source: Dreher, Axel, Noel Gaston and Pim Martens (2008), Measuring Globalization Gauging its Consequences (New York: Springer)

The KOF Index economic globalization component, measures long distance flows of goods, The KOF Index economic globalization component, measures long distance flows of goods, capital and services as well as information and perceptions that accompany market exchangescapital and services as well as information and perceptions that accompany market exchanges

29

Globalization – Gauging its Consequences (New York: Springer). capital and services as well as information and perceptions that accompany market exchanges. capital and services as well as information and perceptions that accompany market exchanges.

Globalization and Business GrowthBelow is a list of bank initiatives to help clients surpass hurdles to globalized operations.

InitiativesPayments / Collections

Centralized cross border payment solutions

Single nostro accounts

Bundled foreign currency payment/collections accounts

Liquidity & Investments

Global online investment platforms

Interest optimization / revised investment strategies to maximize returns

Global target balancing

Multi-currency notional pooling

Technology / Information Platforms

Global online banking platforms with multi-bank visibilityg p y

File exchange platforms

Electronic bank account management (eBAM) solutions

ERP / bank integrator technology

T k t ti (TWS)

30

Treasury workstations (TWS)

Efficiencies and Expense ReductionEfficiency in Bank Integration• Open standards (e.g. SWIFTNet) that reduce

companies’ dependency on bank proprietary systems to initiate transactions

SWI

BAN

Payments

Acknowledgements

Paper to Electronic• eStatements/ Statements on the web• Automated procure–to-pay solutions, that

eliminate paper processes and streamline receivables and payables

ERPIFT-NET

NK

APPS

TWSLock Box Data

Bank Statements

Confirmations

• Electronic bank account management: enable fully electronic processes using digital identities and minimize account opening cycle times

• Migrating checks to Automatic Clearing House (ACH) and prepaid cards

• Customer Initiated Payments: reduced fees from

BANKS

yelectronic bill presentment and electronic payment channels and accelerated receipt of funds (vs. checks)

Expense Reduction Solutions. ACH Payments / Collections BANKS• ACH Payments / Collections

• Procurement and T&E Commercial Cards• Earnings Credit Rates (ECR): reduce

transaction services fees through bank balances• Centralized treasury procurement leads to lower

negotiated banking fees

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g g

Headline Events that Moved Markets

4

4.5

5 Central Banks globally mount aggressive

coordinated effort to unlock flow of credit

Fed announces it will be keeping Fed Funds rates low for an extended period

3

3.5

4

Fed bailed out Fannie Mae and

Freddie Mac

Barack Obama elected President

$787 B Stimulus Bill

The Fed authorizes Reserve Banks to offer

term deposits to

1 5

2

2.5

Rat

e (%

)

Results of Stress Tests

BofA to Buy ML. Lehman

Bros. declares bankrupt

Stimulus Bill signed into

law.

term deposits to institutions that are eligible to receive earnings on their

balances at Reserve Banks.

0.5

1

1.5 released for the 19 largest bank holding

companies in the U.S.

pDodd-Frank

Financial Reform Bill

Signed into Law

European Sovereign

Risk Issues Mount

$1.8T partial nationalization of

European FIs; $250 B equity

infusion into US Banks

0

Date

32

10 Year US Treasury Yield 3Month LIBOR Fed Funds Effective

Average Investment Portfolio CompositionThe average investment portfolio composition has seen an increased usage of bank deposits and a decreased usage of Money Market Funds, particularly Treasury Funds.

All Respondents

201020092008*

All Respondents

Companies with Annual Revenue Over $1Bn

201020092008*

33

Source: AFPNote that the “Pure” Treasury MM Funds information was not available in the 2008 survey.

Dodd-Frank Act - Impact on US Corporate Investment Offeringsg

Investment US DDA (ECR)

US TimeDeposits

US MoneyMarket Deposit

Offshore Sweeps

US Interest Bearing DDA

Prime/CP Money Market

Government/ Treasury

Money Market

Triparty Repurchase Agreements

Government/ Treasury

Bills

Commercial Paper

Bank Deposit Diversified Investment Direct Investments

( ) p pAccounts

p gFunds Market

FundsAgreements Bills p

Risk Bank/FDIC Bank Bank Bank Bank-Sovereign Diversified Sovereign Diversified Sovereign Issuer

Accessibility Daily At Maturity Daily Daily At Maturity Daily At Maturity At Maturity At MaturityAccessibility Daily At Maturity Daily Daily At Maturity Daily Daily At Maturity At Maturity At Maturity

Dodd-Frank Impact

Full FDIC Insurance Available

Permanent $250M

ins rance

Permanent $250M

insurance. Rates likely to become closer

to offshore

Less Necessary,

but still benefit from lack of

Permissible in the US as of July 21/2011. Permanent Increased Competition from onshore bank deposits

12M LIBOR

Impact 12/31/10-12/31/12

insurance onshore alternatives.

Still benefits from lack of

reserve requirement

from lack of reserve

requirement

Permanent $250M

Insurance

Increased Competition from onshore bank deposits

6M LIBOR

3M LIBOR

O/N LIBOR

O/N LIBID

34

Zero/Non-interest Bearing

Conclusion

Theme OfferingsOngoing global expansion can be accommodated by offerings that help improve cash visibility and

k f t d li idit1. Globalization and Business

Expansion

make use of trapped liquidity– Online banking platforms with multi-bank visibility– Global online investment platforms– Cross-border target balancing– Multi-currency notional pooling

2. Budget Expense Pressure

Solutions that foment bank integration and electronification reduce fees, eliminate paper processes and streamline receivables and payables cycles. Solutions to relieve budget expense pressure may include – Electronic bank account management platforms– Automated procure–to-pay solutions / paper toe electronic payments– Electronic customer initiated payments– Online statements

The financial crisis and recent regulatory changes have shortened the cash investment horizon and led corporate treasuries to focus more on having access to their liquidity than on returns. As a result there h b

3. Financial Crisis, Regulatory Changes and Interest Rate Environment

has been:– Increased focus on visibility and counter-party risk– Necessity to understand evolving regulations– Increased usage of certain bank deposit products– Decreased usage of money market funds, particularly treasury funds

35

Takeaways

• Lessons From The Crisis: What’s Next For Treasury? http://www.aitegroup.com/Reports/ReportDetail.aspx?recordItemID=611

• Liquidity Risk Management: Heed Regulations or Go Bust• Liquidity Risk Management: Heed Regulations or Go Bust http://www.aitegroup.com/Reports/ReportDetail.aspx?recordItemID=679

• Trade Finance and Cash Management Convergence: An Imperative for Both Banks and Their Clientshttp://gtnews.com/article/8088.cfm

• A New World for Accounts Payable - But is it Lost in Transaction? http://gtnews.com/article/8091.cfm

• Increase Productivity, Eliminate Paperhttp://gtnews.com/article/8080.cfm

• 2010 AFP Liquidity Survey http://www.afponline.org/pub/res/research/liquidity.htmlhttp://www.afponline.org/pub/res/research/liquidity.html

• KOF Index Dreher, Axel, Noel Gaston and Pim Martens (2008), Measuring Globalization –Gauging its Consequences (New York: Springer)

36

Biographies & Contact Details

Christine Barry, Research Director, Aite Group

Contact details

Christine BarryCBarry@aitegroup.comTel : (917) 546-9180Tel.: (917) 546 9180

Sherri Bazan, Cash Manager, AT&T Sherri Bazansherri.bazan@att.comTel.: (214) 757-5037

Mi h l B k it M i Di t N th A i Li idit I t t & Michael BerkowitzMichael Berkowitz, Managing Director, North America Liquidity, Investments & Information Services, Citi

Michael Berkowitzmichael.n.berkowitz@citi.comTel: (212) 816-0981

37

Q&A

38