FD Report: Safe and sound – the importance of spreading your banking risk

QCA members, AIM-listed in the main, are suffering more than most, according to Stewart. “The reality is that the big banks have effectively closed their doors. So we’re seeing banks coming in to fill the gap that are smaller and more entrepreneurial. They’re trying to create a business out of that opportunity and that can be a bonus for mid-market firms.”

Proof of this is the number of businesses looking to access lending from foreign banks. However, it’s not a free-for-all. Some industry experts believe relying on the network of foreign banks for business-critical operations is a risk too far.

And there is a new development that could change the dynamic of the blue-chip bank relationship. Ensuring banking systems are integrated and secure is the leading challenge for FDs and treasurers. Any business with international dealings will be well aware of the difficulties of managing the different payment stations.

International payment and treasury services are a great source of revenue for banks, so the chances are that any international relationship bank will offer a range of payment management solutions. And the chances are they will run these services via Swift.

Put simply, Swift (Society of Worldwide Interbank Financial Telecommunication) is a messaging service used by banks. In essence it is an email system. The difference is that it is the most secure email system in the world and the standard means by which banks send mandates to each other.

Until now, it has been used solely by international banks making payments on clients’ behalf. However, Swift is now being offered as a direct consumer service. “There is opportunity for larger corporates ­ where the cost benefits work ­ to access Swift services,” says Strachan. “It enables businesses to deal directly with a wider variety of banks because they are able to send them messages directly. Previously, to do that you needed a lot of bank systems which meant a lot of interfaces with your own systems. But if you’ve got Swift you can send messages to lots of banks.”

So far, Cisco, Intel, Vodafone, Tesco have all joined the party and are in the process of building their own international payments system. Malcolm Cooper is group tax and treasury director at National Grid: “We are looking at the possibility of implementing Score [standardised corporate environment],” he says. “There is an alternative system, but Score is the preferred option. The benefits for us will be simplifying our payments systems, infrastructure and processes. In terms of risks we need to make sure we understand and address the security issues. The banks that provide existing payments systems are fairly relaxed ­ I think they see this as inevitable.”

Creating a standard
The biggest issue is a lack of a standard format. There are currently too many platforms, so establishing global standards is key. Some multinationals are reporting in scores of formats, so we’re at year zero for standardising that. Only the very largest companies need think about this now, but as Cooper says, Swift will ultimately be the standard form of payments processing and transaction guarantees across the world.

Some banks, including HSBC, are committed to rolling it out and they want customers to join. Michael Cannon, HSBC’s head of payment cash management in Europe, told a recent conference the focus had changed from cost-cutting to liquidity management. With credit markets being so tight, managing what cash you have is even more important.

Banks are aware of big corporates’ need to find and pool their cash in order to pay down debt and reduce the need for expensive borrowing. And that means dealing in marginal currencies, which means a global system is necessary.

The question this poses is whether widespread adoption of Swift will mean a fundamental shift away from process to value-added services for the big banks. And the question also remains: are they prepared for that?

Forex provision
As some FDs look beyond banks for ancillary services, Louis Pearce, head of sales at Caxton FX outlines some quick wins for FDs entering the murky world of foreign exchange.

1 Beware commission-based models
Most FX brokerages pay traders low salaries topped up with attractive commission. That would encourage traders to attract as many customers as possible to make as many trades as possible.

Great for the broker, not so much for the client. After all, it is in the trader’s interest to get clients trading, even when the rates might not be favourable, or the timing poor. So, always find out the broker’s renumeration policy. The heavier the commission offered to traders, the more likely it is that the client will receive pressure to trade unnecessarily. A commission-free model, where the trader is paid a competitive flat rate, is more favourable.

2 Know who you’re dealing with
The growth in the number of foreign exchange brokers has brought more choice. It has also multiplied the number of unregulated brokers offering their services. Put simply, the barrier to entry for the FX market is so low that it often requires little more than a fancy website. Many will be perfectly reputable and professional outfits.

However, these companies are engaged in high risk strategies predicated on minute movements in very volatile markets. The result? Greater risk of bankruptcy or business interruption. So, verification becomes all important.

3 Demand guarantees
There are a lot of FX companies making huge profits every month, but not all can guarantee their clients’ funds are protected should the broker go out of business. So FDs should demand guarantees that their funds will be safe with their broker, preferably to a level mandated by the FSA. The most reputable brokers, rather than holding their clients money on account (and thereby exposing it to loss), hold funds in a separate, ring-fenced account (akin to escrow). So any problems the broker encounters won’t affect clients’ money. Given the volatility of the global currency markets that is surely worth something.

4 Get your timing right
To achieve the best possible return on your currency dealings, timing is crucial. Not just at the time you buy, but in terms of when you alert your broker to future needs. The more time you allow, the better the outcome.

For clients that buy on an ‘as-and-when’ basis it can be quite tricky. Remember, at the time of getting in touch, they’re looking for the best rate they can get. If you’re buying euros and you need them in two minutes’ time, then there’s not much they can do, other than quote you a rate of exchange – and anyone can do that. So, allow a little bit of time.

The key message here is: businesses willing to engage with their broker in a timely fashion will increase their chances of achieving the best possible rate of return.