Technology has given a wide range of entities complete access to a greater number of payments options at a lower cost than ever before. Deutsche Bank's response: to innovate and to build scale.
"As elements of commoditization creep into this business, you're seeing more and more financial institutions cherry-pick where they want to play and where they don't want to play," says Harold Young, global head of high value payments, global cash management, Deutsche Bank (Frankfurt, EUR 803 billion in assets). "We've got the scale, we've got the volume and we've got the footprint that allows us to take a global proposition to the market."
These days, a bank's proposition has to include more than simply managing the pipes between corporate clients and their trading partners. Since corporations can transact among themselves via payments clubs and similar mechanisms, treasury services businesses have had to adapt. "As SWIFT [Society for Worldwide Interbank Financial Telecommunication], starts to insinuate itself into the corporate community with the introduction of closed user groups and FileAct capabilities, it really takes out of the banks' hands the access channels that were a key lock-in point up until now," says Young.
Furthermore, banks are the ones being asked to provide corporations with access to the same capabilities, which is causing them to rethink their business strategies. "It has put the banks in the position of having to react to expectations that SWIFT has raised in the market for these capabilities - but they don't have to deliver it themselves," says Young. "That's creating a curious dynamic - 'Go get your bank to do all the heavy lifting.' "
Nevertheless, the business of banking is about far more than just payments. "Behind the transactional business, there's always the need for intra-day credit, liquidity and access to foreign exchange markets," Young says. And if it's heavy-lifting the market wants, then that's what it will get.
By the end of 2004, Deutsche Bank intends to have completed its Money Transfer New Architecture (MTNA), the culmination of a 15-month revamping of its payments processing system and global messaging platform. The result will be a single system for Deutsche Bank's entire global footprint. "This allows Deutsche Bank to have the same system supporting all of its payments activity everywhere we do payments activity around the world. It affords us tremendous efficiencies and expense savings in terms of rolling out new products, time-to-market around new products, and having consistency so that systems look the same around the globe," says Young. "That's a pretty formidable competitive edge," he contends.
Honing a Keen Edge
Even though restrictions on banks' ability to hold accounts denominated in currencies other than the U.S. dollar were lifted some time ago, banks have been slow to take advantage of the increased leeway. "Many of the banks have continued to [operate] on a dollar-only basis because their legacy processing platforms and the systems they've linked into have been single-flavor, U.S. dollar," says Young.
Other innovations in the pipeline include "conditional payments" that can be triggered based on account positions, credit amounts, payments from a given counterparty or any other related criteria. "For instance, I may be waiting for settlement of a divestiture; maturity of funds that I have invested in either a long-term or short-term investment vehicle; or payment from a specific vendor to pay a specific supplier, where there's a three-way relationship between the vendor, the corporation and the supplier," Young explains.
Upon meeting pre-established conditions, these types of transactions can be handled automatically, with neither intervention nor delay. Such capabilities will also support the creation of corporate financing deal structures operating at unprecedented speed, says Young.
In addition, Deutsche Bank will provide enhanced capabilities on the information and reporting side, such as "counterparty behavior" reports and better assessments of days sales outstanding (DSO), "one of the primary vectors of managing working capital with precision," says Young.