More bad news for the banking sector this week as five of the largest US financial institutions (Wachovia, SunTrust, Fifth Third, Regions Financial and Washington Mutual) announced a total of $11 billion in quarterly losses.  Just when you think the worst is over, the financial services industry finds a way to deliver more surprises.  But believe it or not, there are other interesting things happening in the banking industry in addition to the subprime mortgage crisis.  In my last post I talked about the Single European Payments Area (SEPA) launched earlier this year, which I believe will have as big of an impact on banking going forward as the subprime fallout.  One of the other trends that I find interesting is the changing dynamics between corporations and their banking partners. 

During the past 18 months I have spent a lot of time visiting with both corporates and financial institutions throughout North America, Europe and Asia.  In total I have probably met with 75 companies during the past year and half.  One of the conclusions that I have reached is that almost every major multi-national corporation of $5 billion or larger has a major transformation project occurring in their back office.  What are they changing?  A better question is what is not changing?  Multi-national corporations are reorganizing their treasury and accounting functions; re-evaluating their approach to payment processing; renegotiating agreements with key banking partners and re-architecting their financial information systems. 

I have spent some time in recent months analyzing the underlying forces driving these dramatic changes with a goal of understanding the market dynamics better.  Some forces are obvious such as the desire to reduce costs and operate more efficiently.   The other forces are more specific to financial processes including changing regulations, disruptive technologies and increasing globalization.  I compiled a list of the top 5 forces that I think are driving the transformation projects at multi-national corporations.  The first five are business oriented forces:

1.       Conversion from Checks to EFT – The past 10 years has seen a migration away from paper based check instruments to electronic funds transfer.  The most significant transition is occurring in the US, which historically utilized checks as the primary B2B and B2C payment instrument.

2.       Payment Factories – Multi-national corporations are rethinking the organizational structures for their Accounts Payable (A/P) groups.  Corporations are moving from country-centric A/P organizations towards shared service centers operating on a regional or global basis.

3.       Centralized Treasury – In addition to creating shared service centers for A/P, corporations are centralizing treasury functions as well.  Centralization enables a number of efficiencies in the areas of cash forecasting, foreign exchange and cross-border payments.

4.       In-House Bank – Corporations are establishing their own in-house banks to complement centralized treasury functions.  The in-house entities operate much like a commercial bank by offering payment processing, cash management and collections functions to the various subsidiaries.

5.       Consolidation of Banking Relationships – Along with centralization of internal functions, multi-national corporations are also rationalizing the number of banking relationships they maintain.  In many cases, corporates are reducing banking providers from over 100 to 2-3 global relationships.

Some multi-national corprorations are in the early phases of these transformation projects while others have nearly completed them.  It will take another five years for the transformation to fully occur.  However, once complete the dynamics of corporate banking will have changed forever…