Put all your eggs in one big basket
For a long time centralisation has been the holy grail when it comes to improvements in treasury and cash management.
It delivers many advantages, such as improved visibility, better risk management, lower costs and easier compliance with SOX and accounting guidelines.
Centralisation of payments has been one of the most effective ways to cut costs and banking fees in the cash management operations.
Together with the introduction of a payments factory, it has also been common to rationalise the number of banks and bank accounts used for payments.
Large, international operating companies can have hundreds of bank accounts across the world and some even utilize hundreds of banks worldwide. Each bank relationship costs time and money and so does each bank account, so why not cut the number to save costs and increase visibility?
Some companies have the goal of using just one or two banks, and many companies have also been very efficient in cutting the number of payment relationship banks to a handful or less.
This helps to create an efficient payment process. On the relationship side, you have to deal with fewer banks and you even have more negotiation power when you put more traffic though the bank. It also helps to reduce the technology costs as fewer banks and bank accounts reduce the number of interfaces you need to build.
But it also creates a new risk – a risk that would have been laughed at just a year ago: what happens if one of these payment banks goes under?
You completely depend on them for payment processing and, if a bank stops operating, you cannot access your bank accounts. Not only would you not know how much money you would have in your accounts, but you would not be able to pay your suppliers and employees, or debit your clients.
Technically you would have become insolvent, which could also lead to bankruptcy in the end. And all to save a few pounds on the bank fees…
The payment processing banks used by big international corporates are usually the well-known names such as J.P. Morgan Chase, Deutsche Bank, HSBC, and Citi. But just how big is the risk that one of these mammoth international banks would stop operating? I think the risk is very slight. No government would allow any of these banks to stop operating. They are simply too important to the local and world economy to fail. We have just seen it again with the latest rescue of Citi over the weekend.
So, if you only bank with one bank, choose one that is too big to fail.
Even though the risk of one of them collapsing is very little, if I was responsible for a corporate’s payments, I would definitely sleep better if I had some redundancy in my bank relationships for payments.
