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How to improve the relationship with banks thanks to centralised FX
As businesses grow globally, the complexity of managing treasury operations intensifies. Routine treasury tasks become more challenging to handle, including:
- Keeping track of cash, investments, debt, and overall liquidity.
- Overseeing and controlling risk.
- Managing and leveraging the relationship with Banks and liquidity providers
CFOs and financial directors implement diverse strategies and technological advancements to effectively navigate this complexity. Centralisation of treasury operations is one approach that offers significant advantages.
In this blog, we explore the different benefits of treasury centralisation and how it can, among other benefits, improve your company's relationship with banks and liquidity providers.
Defining Centralised Treasury
A centralised treasury operates as a unified, strategic center, consolidating various treasury-related functions across the group’s entities. This approach integrates the management of cash flows, risk, and liquidity into a cohesive operation, streamlining treasury activities that were previously scattered across various subsidiaries of the organisation.
Centralisation is more a flexible and scalable process than a one-fits-all solution. It should be gradually adopted to align with a corporation's structure and objectives. This process might start with the basic consolidation of cash, interest rates, and foreign exchange operations, and extend to establishing a central hub bank (in-bank) to facilitate standardised transactions for all subsidiaries, either through a payments factory or a shared service center.
Over time, a large multinational corporation could evolve towards a completely centralised treasury system, incorporating integrated Enterprise Resource Planning (ERP) and Treasury Management System (TMS) solutions, alongside in-house banking or netting arrangements.
Improving relationships with banks through centralisation
Treasurers must collaborate with various banking partners and maintain relationships with multiple liquidity providers on behalf of their organisations to meet obligations. A centralised treasury offers a number of tangible and intangible benefits to the corporation when engaging with banks:
- Pool of Ressources and Lower Transaction Costs: Banks welcome the opportunity to hold—and subsequently invest—a larger pool of resources that results from centralisation. In return, transaction fees are reduced for the various services the firm uses, such as wire transfers, check processing, and account maintenance fees. By reducing the number of accounts, a company decreases the volume of transactions processed through multiple accounts, thereby reducing the aggregate fees paid for these services.
- Better terms and rates: Similar to the reduction of bank accounts, centralising FX operations can lead to economies of scale in foreign exchange transactions. A centralised approach allows for aggregating FX trades, which can result in better negotiation leverage with banks or FX providers, leading to improved pricing, terms, and reduced spreads.
- Relationship Building: By funneling more business through fewer banks, companies can strengthen their relationships with these institutions. Stronger relationships can lead to more favorable terms and personalised service.
- Enhanced Risk Management: Centralised FX operations offer better visibility into the company’s currency exposures and positions. This visibility allows for more effective hedging strategies, which can be communicated clearly to the banks, aligning the risk management strategies of both parties.
- Technology Integration: Many businesses with centralised FX operations use specialised platforms for managing their currency transactions. Integrating these platforms with the banks’ systems can improve efficiency, reduce errors, and streamline reconciliation processes.
As companies grow into international markets, the escalating complexity in managing treasury functions follows, with challenges such as tracking cash and investments, currency management, and executing financial market transactions. All of which can be improved with a healthy relationship with banks and liquidity providers.
Centralising FX operations is a key strategy for companies to enhance their interactions with banks, leading to cost savings, lower fees, improved terms, stronger relationships, and more effective risk management.
