The corporate treasury agenda continues to focus on cash visibility, liquidity centralization, bank/bank account rationalization, and finally digitization to enable greater operational and financial efficiencies. Digital transformation within corporate treasury is a must have, not a nice to have and with technology continuing to evolve, the potential opportunities to both accelerate and elevate performance has just been taken to the next level with ISO 20022 becoming the global language of payments. In this 6^th article in the ISO 20022 XML series, Zanders experts Fernando Almansa, Eliane Eysackers and Mark Sutton provide some valuable insights around why this latest global industry move should now provide the motivation for corporate treasury to consider a cash management RFP (request for proposal) for its banking services.

Why Me and Why Now?

These are both very relevant important questions that corporate treasury should be considering in 2024, given the broader global payments industry migration to ISO 20022 XML messaging. This goes beyond the Swift MT-MX migration in the interbank space as an increasing number of in-country RTGS (real-time gross settlement) clearing systems are also adopting ISO 20022 XML messaging. Swift are currently estimating that by 2025, 80% of the domestic high value clearing RTGS volumes will be ISO 20022-based with all reserve currencies either live or having declared a live date. As more local market infrastructures migrate to XML messaging, there is the potential to provide richer and more structured information around the payment to accelerate and elevate compliance and reconciliation processes as well as achieving a more simplified and standardized strategic cash management operating model.

So to help determine if this really applies to you, the following questions should be considered around existing process friction points:

1. Is your current multi-banking cash management architecture simplified and standardised?
2. Is your account receivables process fully automated?
3. Is your FX gain/loss calculations fully automated?
4. Have you fully automated the G/L account posting?
5. Do you have a standard ‘harmonized’ payments message that you send to all your banking partners?

If the answer is yes to all the above, then you are already following a best-in-class multi-banking cash management model. But if the answer is no, then it is worth reading the rest of this article as we now have a paradigm shift in the global payments landscape that presents a real opportunity to redefine best in class.

What is different about XML V09?

Whilst structurally, the XML V09 message only contains a handful of additional data points when compared with the earlier XML V03 message that was released back in 2009, the key difference is around the changing mindset from the CGI-MP (Common Global Implementation – Market Practice) Group¹ which is recommending a more prescriptive approach to the banking community around adoption of its published implementation guidelines. The original objective of the CGI-MP was to remove the friction that existed in the multi-banking space as a result of the complexity, inefficiency, and cost of corporates having to support proprietary bank formats. The adoption of ISO 20022 provided the opportunity to simplify and standardize the multi-banking environment, with the added benefit of providing a more portable messaging structure. However, even with the work of the CGI-MP group, which produced and published implementation guidelines back in 2009, the corporate community has encountered a significant number of challenges as part of their adoption of this global financial messaging standard.

The key friction points are highlighted below:

Diagram 1: Key friction points encountered by the corporate community in adopting XML V03

The highlighted friction points have resulted in the corporate community achieving a sub-optimal cash management architecture. Significant divergence in terms of the banks’ implementation of this standard covers a number of aspects, from non-standard payment method codes and payment batching logic to proprietary requirements around regulatory reporting and customer identification. All of this translated into additional complexity, inefficiency, and cost on the corporate side.

However, XML V09 offers a real opportunity to simplify, standardise, accelerate and elevate cash management performance where the banking community embraces the CGI-MP recommended ‘more prescriptive approach’ that will help deliver a win-win situation. This is more than just about a global standardised payment message, this is about the end to end cash management processes with a ‘structured data first’ mindset which will allow the corporate community to truly harness the power of technology.

What are the objectives of the RFP?

The RFP or RFI (request for information) process will provide the opportunity to understand the current mindset of your existing core cash management banking partners. Are they viewing the MT-MX migration as just a compliance exercise. Do they recognize the importance and benefits to the corporate community of embracing the recently published CGI-MP guidelines? Are they going to follow a structured data first model when it comes to statement reporting? Having a clearer view in how your current cash management banks are thinking around this important global change will help corporate treasury to make a more informed decision on potential future strategic cash management banking partners. More broadly, the RFP will provide an opportunity to ensure your core cash management banks have a strong strategic fit with your business across dimensions such as credit commitment, relationship support to your company and the industry you operate, access to senior management and ease of doing of business. Furthermore, you will be in a better position to achieve simplification and standardization of your banking providers through bank account rationalization combined with the removal of non-core partner banks from your current day to day banking operations.

In Summary

The Swift MT-MX migration and global industry adoption of ISO 20022 XML should be viewed as more than just a simple compliance change. This is about the opportunity to redefine a best in class cash management model that delivers operational and financial efficiencies and provides the foundation to truly harness the power of technology.

Early October, the Basel Committee on Banking Supervision (BCBS) published a report[1] on the 2023 banking turmoil that involved the failure of several US banks as well as Credit Suisse. The report draws lessons for banking regulation and supervision which may ultimately lead to changes in banking regulation as well as supervisory practices. In this article we summarize the main findings of the report[2]. Based on the report’s assessment, the most material consequences for banks, in our view, could be in the following areas:

• Reparameterization of the LCR calculation and/or introduction of additional liquidity metrics
• Inclusion of assets accounted for at amortized cost at their fair value in the determination of regulatory capital
• Implementation of extended disclosure requirements for a bank's interest rate exposure and liquidity position
• More intensive supervision of smaller banks, especially those experiencing fast growth and concentration in specific client segments
• Application of the full Basel III Accord and the Basel IRRBB framework to a larger group of banks

Bank failures and underlying causes

The BCBS report first describes in some detail the events that led to the failure of each of the following banks in the spring of 2023:

• Silicon Valley Bank (SVB)
• Signature Bank of New York (SBNY)
• First Republic Bank (FRB)
• Credit Suisse (CS)

While each failure involved various bank-specific factors, the BCBS report highlights common features (with the relevant banks indicated in brackets).

• Long-term unsustainable business models (all), in part due to remuneration incentives for short-term profits
• Governance and risk management did not keep up with fast growth in recent years (SVB, SBNY, FRC)
• Ineffective oversight of risks by the board and management (all)
• Overreliance on uninsured customer deposits, which are more likely to be withdrawn in a stress situation (SVB, SBNY, FRC)
• Unprecedented speed of deposit withdrawals through online banking (all)
• Investment of short-term deposits in long-term assets without adequate interest-rate hedges (SVB, FRC)
• Failure to assess whether designated assets qualified as eligible collateral for borrowing at the central bank (SVB, SBNY)
• Client concentration risk in specific sectors and on both asset and liability side of the balance sheet (SVB, SBNY, FRC)
• Too much leniency by supervisors to address supervisory findings (SVB, SBNY, CS)
• Incomplete implementation of the Basel Framework: SVB, SBNY and FRB were not subject to the liquidity coverage ratio (LCR) of the Basel III Accord and the BCBS standard on interest rate risk in the banking book (IRRBB)

Of the four failed banks, only Credit Suisse was subject to the LCR requirements of the Basel III Accord, in relation to which the BCBS report includes the following observations:

• A substantial part of the available high quality liquid assets (HQLA) at CS was needed for purposes other than covering deposit outflows under stress, in contrast to the assumptions made in the LCR calculation
• The bank hesitated to make use of the LCR buffer and to access emergency liquidity so as to avoid negative signalling to the market

Although not part of the BCBS report, these observations could lead to modifications to the LCR regulation in the future.

Lessons for supervision

With respect to supervisory practices, the BCBS report identifies various lessons learned and raises a few questions, divided into four main areas:

1. Bank’s business models

• Importance of forward-looking assessment of a bank’s capital and liquidity adequacy because accounting measures (on which regulatory capital and liquidity measures are based) mostly are not forward-looking in nature
• A focus on a bank’s risk-adjusted profitability
• Proactive engagement with ‘outlier banks’, e.g., banks that experienced fast growth and have concentrated funding sources or exposures
• Consideration of the impact of changes in the external environment, such as market conditions (including interest rates) and regulatory changes (including implementation of Basel III)

2. Bank’s governance and risk management

• Board composition, relevant experience and independent challenge of management
• Independence and empowerment of risk management and internal audit functions
• Establishment of an enterprise-wide risk culture and its embedding in corporate and business processes.
• Senior management remuneration incentives

3.Liquidity supervision

• Do the existing metrics (LCR, NSFR) and supervisory review suffice to identify start of material liquidity outflows?
• Should the monitoring frequency of metrics be increased (e.g., weekly for business as usual and daily or even intra-day in times of stress)?
• Monitoring of concentration risks (clients as well as funding sources)
• Are sources of liquidity transferable within the legal entity structure and freely available in times of stress?
• Testing of contingency funding plans

4. Supervisory judgment

• Supplement rules-based regulation with supervisory judgment in order to intervene pro-actively when identifying risks that could threaten the bank’s safety and soundness. However, the report acknowledges that a supervisor may not be able to enforce (pre-emptive) action as long as an institution satisfies all minimum requirements. This will also depend on local legislative and regulatory frameworks

Lessons for regulation

In addition, the BCBS report identifies various potential enhancement to the design and implementation of bank regulation in four main areas:

1. Liquidity standards

• Consideration of daily operational and intra-day liquidity requirements in the LCR, based on the observation that a material part of the HQLA of CS was used for this purpose but this is not taken into account in the determination of the LCR
• Recalibration of deposit outflows in the calculation of LCR and NSFR, based on the observation that actual outflow rates at the failed banks significantly exceeded assumed outflows in the LCR and NSFR calculations
• Introduction of additional liquidity metrics such as a 5-day forward liquidity position, survival period and/or non-risk based liquidity metrics that do not rely on run-off assumptions (similar to the role of the leverage ratio in the capital framework)

2. IRRBB

• Implementation of the Basel standard on IRRBB, which did not apply to the US banks, could have made the interest rate risk exposures transparent and initiated timely action by management or regulatory intervention.
• More granular disclosure, covering for example positions with and without hedging, contractual maturities of banking book positions and modelling assumptions 

3. Definition of regulatory capital

• Reflect unrealised gains and losses on assets that are accounted for at amortised cost (AC) in regulatory capital, analogous to the treatment of assets that are classified as available-for-sale (AFS). This is supported by the observation that unrealised losses on fixed-income assets held at amortised cost, resulting from to the sharp rise in interest rates, was an important driver of the failure of several US banks when these assets were sold to create liquidity and unrealised losses turned into realised losses. The BCBS report includes the following considerations in this respect:
  • If AC assets can be repo-ed to create liquidity instead of being sold, then there is no negative impact on the financial statement
  • Treating unrealised gains and losses on AC assets in the same way as AFS assets will create additional volatility in earnings and capital
  • The determination of HQLA in the LCR regulation requires that assets are measured at no more than market value. However, this does not prevent the negative capital impact described above
• Reconsideration of the role, definition and transparency of additional Tier-1 (AT1) instruments, considering the discussion following the write-off of AT1 instruments as part of the take-over of CS by UBS

4. Application of the Basel framework

• Broadening the application of the full Basel III framework beyond internationally active banks and/or developing complementary approaches to identify risks at domestic banks that could pose a threat to cross-border financial stability. The events in the spring of this year have demonstrated that distress at relatively small banks that are not subject to the (full) Basel III regulation can trigger broader and cross-border systemic concerns and contagion effects.
• Prudent application of the ‘proportionality’ principle to domestic banks, based on the observation that financial distress at such banks can have cross-border financial stability effects
• Harmonization of approaches that aim to ensure that sufficient capital and liquidity is available at individual legal entity level within banking groups

Conclusion

The BCBS report identifies common shortcomings in bank risk management practices and governance at the four banks that failed during the 2023 banking turmoil and summarizes key take-aways for bank supervision and regulation.

The identified shortcomings in bank risk management include gaps in the management of traditional banking risks (interest rate, liquidity and concentration risks), failure to appreciate the interrelation between individual risks, unsustainable business models driven by short-term incentives at the expense of appropriate risk management, poor risk culture, ineffective senior management and board oversight as well as a failure to adequately respond to supervisory feedback and recommendations.

Key take-aways for effective supervision include enforcing prompt action by banks in response to supervisory findings, actively monitoring and assessing potential implications of structural changes to the banking system, and maintaining effective cross-border supervisory cooperation.

Key lessons for regulatory standards include the importance of full and consistent implementation of Basel standards as well as potential enhancements of the Basel III liquidity standards, the regulatory treatment of interest rate risk in the banking book, the treatment of assets that are accounted for at amortised cost within regulatory capital and the role of additional Tier-1 capital instruments.

The BCBS report is intended as a starting point for discussion among banking regulators and supervisors about possible changes to banking regulation and supervisory practices. For those interested in engaging in discussions related to the insights and recommendations in the BCBS report, please feel free to contact Pieter Klaassen.

[1] Report on the 2023 banking turmoil (bis.org) (accessed on October 19, 2023)

[2] Although recognized as relevant in relation to the banking turmoil, the BCBS report explicitly excludes from its consideration the role and design of deposit guarantee schemes, the effectiveness of resolution arrangements, the use and design of central bank lending facilities and FX swap lines, and public support measures in banking crises.

Treasurers dealing with multiple jurisdictions, scattered banking landscape, and local requirements face many challenges in this regard. Japan is one of the markets where bank connectivity is indeed a challenge, especially when it comes to connecting with local banks.

Traditional options

The initial reaction from treasurers not familiar with local market conventions might be to seek connection through the SWIFT network. However, in Japan only a handful of banks offer SWIFT connectivity. Second natural choice is the Host-to-Host connection (H2H). This is the classic File Transfer Protocol (FTP), or preferably the secured version (sFTP) setup. Some will say old fashioned, rather than classic, since it is as old as the internet. Nonetheless, it is still popular, and frankly quite often the best fit for the purpose. However, if there are dozens of local banks to connect to, it can be difficult to be expected to connect to each of them with a direct H2H. While this could be technically feasible, it would be nothing short of a nightmare to maintain, with the initial setup being time-consuming in the first place.

Other solutions

There is an answer, or should we rather say ANSER, to this question. ANSER, an abbreviation of ‘Automatic answer Network System for Electrical Request’, is a data transfer system provided by NTT Data Corporation since 1981, which links banks with firms.[1] ANSER then is a way to connect a corporate client to the bank. The system has been around for a while, and together with Cash Management Service (CMS) centers it is a part of the so-called Firm Banking solution in Japan. Since its inception, ANSER offered a wider range of services, through which corporates could access their banking information. Among the offered channels are telephone, fax, firm banking terminal, and personal computer. With the ever-increasing need for speedy and accurate information exchange, the more traditional ways, such as telephone and fax, gave way to the more sophisticated and automated solution, namely eBAgent.

eBAgent making use of API

The said eBAgent is a proprietary middleware platform offered by NTT Data. The solution establishes an automated connection with banks through the above-mentioned ANSER network. In short, eBAgent offers a gateway to multiple local banking partners in Japan utilizing the ANSER network. The remaining part for the corporate is then to establish a connection between the TMS and eBAgent, and secure appropriate contracts with the eBAgent provider, NTT Data, as well as the banks.

As for the connection protocol, the choice is between the classic sFTP, or Application Programming Interface (API). The latter has the real-time advantage, with less lag between the pick-and-drop sFTP connection. API seems to be a choice for an increasing number of corporates these days in this area. What is also interesting, apart from the API connection, are the supported formats for transfers and bank statements. In addition to the local Japanese ZENGIN, the protocol also offers data transmission in a proprietary XML format. This XML format is actually quite simple, with a very limited amount of tags. In addition to this, unlike the ISO 20022 standard, it contains only one level of tags, without the nesting function. Depending on the exact ERP/TMS infrastructure, eBAgent can also provide conversion services from and to the IS 20022 standard. As for the connection to eBAgent, the whole setup seems easier said than done. However, some TMS providers, in response to the demand from the market, started offering off-the-shelf solutions for a plug-and-play connection to eBAgent. Kyriba and Reval already offer it, with SAP set to roll out its solution on the S/4HANA and Multi Bank Connectivity (MBC) platform in early 2024.

Various ways to connect TMS / ERP with banks in Japan

How to connect with local banks in Japan?

It all depends on the exact landscape of banks and systems. It may just as well turn out that a hybrid solution would be best suited. There is no one-size fits all, as each corporate is unique, thus careful consideration and design will be paramount for a stable and reliable connection with banks. One thing is certain, solutions that involve obtaining bank statement information and enact payments by telephone or fax are simply no longer sufficient. In this day and age, when much sensitive information is exchanged between corporates and banks, having a reliable, automated solution is indispensable.

If you would like to know more, do not hesitate to get in touch with Michal Zelazko via m.zelazko@zandersgroup.com or via + 81 (0) 8 3255 9966

[1] https://www.boj.or.jp/en/paym/outline/pay_boj/pss0305a.pdf

The low interest rate environment has faced banks with structural changes in customer behavior and converging products such as savings and current accounts. ING, one of Europe’s largest players in the savings market and a long-term client of Zanders, has positioned itself as one of the frontrunners in this environment. We sat down with Tom Tschirner (head of market risk at ING Germany) and Maarten Hummel (financial risk officer at ING Group) to gather their view on modeling and balance sheet management after these structural shifts.

In some European countries, savings rates appear to have hit a limit where they have stayed at a low level for a few years, despite interest rates moving down. This would suggest a structural shift where the relation between interest rates and savings rates has broken down. How can banks model savings in this unprecedented situation?

Tom Tschirner: “The situation is different everywhere. Within the countries where we are active, the legal and regulatory frameworks are very different. For example, in countries like Italy or Belgium, the law prohibits further decreases in specific interest rates. In Germany, this regulatory restriction is not in place. From a modeling perspective, this introduces a very different dynamic.”

Maarten Hummel: “It seems all banks are struggling with the impact of these low interest rates on the behavior of their customers. There is no real history on these low rates to use in our modeling. To develop forward-looking scenarios and to know how to model these scenarios we therefore work even more closely with the business.”

How do you weigh these expert opinions in unprecedented scenarios versus historic observations?

Tschirner: “The political wind is towards using historic data. It is challenging to substantiate the basis for your expert opinion towards a regulator. Using data-based model decisions is more straightforward from that point of view, as the model is then objectively determined. However, there are situations like the one we have now, when you just have no or very limited data. And then you must use expert judgement.

The question is then: how good can the experts be? We neither have data nor experience with the current situation. What becomes important in that situation is not to do stupid things. It’s important to know what competitors are doing. For example, if you find out that on average their deposits are modeled for the duration of three years and your own model indicates you should use seven years, you should take a break and reconsider. Particularly when you don’t have enough data and experience.”

What is your role in this as a market risk manager?

Tschirner: “Our role is always to make sure that common sense is around the table and that everyone who is somehow affected by the model knows how much it depends on expert opinion, data, competition and common sense.”

Hummel: “We always have to be sure that we understand and can explain the dynamics in the forward-looking scenarios; how the bank reacts, how the clients react, what would happen in the wider savings market and other relevant factors. There needs to be a logic to explain the scenario outcomes, both on the savings portfolio and the overall balance sheet. We always look at what it means for the bank as a whole, for example: how would we manage the total bank in such a situation? It is not just a simple exercise of running a savings model based on historic data to get the answers – more important is that you assess the overall plausibility. Therefore, when calibrating our savings models, we now spend more time discussing the scenarios in-depth with the various stakeholders in the bank."

Does that mean that both quantitative and qualitative elements are discussed?

Hummel: “The business strategy is leading. We use a global framework for our business strategy to look at how it would play out in a certain environment. Then you need to have discussions on whether that strategy will really hold in the more severe scenarios. We do take scenarios into account in a more qualitative strategy discussion. We have to look at the market, our own balance sheet and how we are positioned. It is an interesting discussion.”

There is no real history on rates below zero.

Maarten Hummel, Financial Risk Officer at ING Group

To what extent do you look at the restrictions on the lending side in discussions on savings modeling?

Hummel: “The starting point is to look at the saving portfolio independently, but at some stage you cannot escape the rest of the balance sheet. For example, if I have a 50-year liability, where am I going to invest it and what is my funding value? There needs to be a check to see if the value attached to it exists.”

Tschirner: “At the end of the day, when it comes to modeling savings, the question that we are trying to answer is: how should we invest the money that we get from our clients? And can you do that totally independently of the asset situation? Most likely not. If the model tells you to invest the money for fifty years, but there are no such assets in the economy, the model is not very helpful. I would not say it is the individual situation of the bank that matters, but more the economy or the country. How easy is it to find long-term assets in Germany, Poland, or Belgium? That certainly plays an important role for the modeling of savings. One year ago, I may not have subscribed to this view, but now I’m quite convinced about that.”

Do the low savings rates impact the relation between the balances on payment accounts and the saving accounts?

Hummel: “Before, the idea was that these have different functions; one for the transactions and one to earn interest. The incentive on the savings side has now largely disappeared. Inevitably, we see many more funds staying on the current account. The question is then: how can you separate the two parts? The client does not bother to put it on the savings account, because the interest is the same. But since we have to be prepared for a scenario where interest rates will go up significantly again, we keep identifying that money as savings. You need data to identify the amount of transactional account money and separate that from the savings amount. Rates have been low for a long period already, so for a newly started bank estimating that will be very hard.”

A large portion of German ING clients is relatively new. Is it therefore harder to get the right data?

Tschirner: “There are different ways to look at it, but what we clearly observe is that the average balance of the current accounts is increasing quite significantly. You can relook at history and try to find a trend, to see what the average balances would be if it were not for the low-rate environment. Or you can look at intra-monthly patterns, driven for example by salaries and rents. If there is a threshold above which you do not find a pattern anymore, then it looks more like a savings account. These are two approaches to determine which part should be modeled as true current account money and which part as savings. There is no standard yet, but given the regulatory attention, we will find an industry standard in the coming year.”

You need data to identify the amount of transactional account money and separate that from the savings amount.

Tom Tschirner, Head of Market Risk at ING Germany

Do you think it is a common blind spot that the segmentation between those two is often not explicitly modeled?

Tschirner: “It’s not the biggest issue that we have. But yes, you need a model. If you want a real good model though, you need all legs of the cycle; you would also need an observation from a point in time that rates increase – and you don’t have that.”

Hummel: “I agree, you need a full cycle. The challenge is that for each solution you put on this, you need an exit strategy, so once savings rates go up again and market rates are high, you gradually build down the savings on your current account. In the meantime, every client is different. We have different sets of clients and you need to have data on how your client composition is changing over time.”

Tschirner: “In Germany, ING is growing, and the number of accounts has been increasing a lot. We also know that the average age of our clients has gone up. You could argue that older clients intend to have higher balances on their accounts and that they do not shift it when rates are around zero. But if you look at data, you will not be able to tell the difference. And there is no data-based way of telling this apart. That makes it challenging to model.”

Zanders & Savings modeling: Zanders has supported many European banks in the development, validation and outsourcing of risk models for non-maturing deposits. We offer support through the entire modelling cycle on topics such as: Calibration of models based on historical data and expert judgement, Substantiation of your model methodology and key assumptions, Continuous model updates on recent market or portfolio developments, The in-house developed Savings Modelling Solution services banks digitally on non-maturing deposits risk modelling and management using efficient calibration, state of the art tooling and longstanding subject-matter expertise.

British American Tobacco (BAT), headquartered in the UK and listed on the London Stock Exchange, is well known as the manufacturer of traditional cigarette brands as well as next generation products such as e-cigarettes. The company, which had a gross turnover of £42 billion in 2015 and employs 50,000 people across its manufacturing operations in 41 countries, is known for its commitment to operating responsibly and with transparency.

BAT recently completed the deployment of project ‘TaO’ which introduced a new target operating model enabled by one instance of SAP across all markets within the group. TaO is the enabler to migrate more processes to financial shared service centers and for the operation of a more centralized treasury function, resulting in greater visibility and control over the group’s cash resources.

Throughout the TaO project, Zanders advised BAT on how to restructure its treasury processes, which were overhauled and pushed towards a centralized model. And, as the company invested in its treasury and cash management infrastructure, the logical next step was to build on the foundation TaO provided to move from elements of best practice to world class cash management.

The TaO project highlighted the potential to increase efficiencies in payables and receivables by channeling payments through ‘on behalf of’ (OBO) structures, Phil Stewart, global head of cash and banking at BAT, says: “The ‘payments/receivables on behalf of’ (POBO/ROBO) structure was a key component of the cash management optimization initiative. These structures leveraged the in-house bank implemented during TaO, allowing for greater transparency, control and risk management while using established SAP channels for the most efficient and cost effective transaction routing.”

The ROBO challenge

BAT is an early adopter for best practices in the cash management and payments space, and in the case of OBO, BAT needed a bank that supported them in this relatively new area. Zanders director Arn Knol says: “POBO isn’t a new concept but this project focused on using virtual accounts to enable ROBO, replacing actual bank accounts with virtual accounts. This meant that each customer had to be assigned a unique virtual account – enabling BAT to see exactly when customers have paid and to replace physical bank accounts with virtual ones.”

One benefit of a ROBO structure is a clear reference for each receivable in central treasury, with data about the payment, which smooths the reconciliation process for receivables. The company also drastically reduces the number of bank accounts for further cost savings and more efficient use of staff time. The efficient processing and reconciliation of receivables also improves the day’s sales outstanding (DSO) process.

There was, however, a challenging aspect to the project: not all banks BAT spoke to were ready to meet the company’s requirements. Stewart says: “One of the challenges we faced was that the banks’ virtual account offerings were at different stages of maturity with very few able to support the model we wanted to deploy. We were able to overcome this to achieve a bespoke solution that worked for us on a consistent basis across all markets in scope. The virtual account space continues to evolve at pace, it is worth noting that a number of banks have made significant strides and are now better placed to meet our requirements.”

Concept and implementation

BAT started the OBO project in January 2016, initially working on a conceptual design for a number of pilot markets. The company’s Asia-Pacific business took on the pilot phase and chose to implement OBO in Hong Kong, Singapore, Australia and New Zealand. These countries had already rolled out the TaO project successfully and, from a regulatory perspective, had few barriers to adopting the structure.

BAT had already carried out due diligence in these markets prior to the start of the TaO project, including in-depth discussions with tax and legal experts, as well as with central banks. During the impact analysis for the OBO project, the company built on this knowledge, adding further technical analysis to identify what information SAP needed. Stewart says: “The conversations we had with Zanders at this stage were invaluable in shaping how BAT wanted to use virtual accounts to simplify account structure and enhance receivables process. They provided a high level of expertise, which enabled us to finalize the design at an early stage. This was key to the project’s success and timely implementation.”

BAT chose Deutsche Bank as the main banking partner for the Asia-Pacific pilot project. Communication between the company and the bank was crucial at this stage and facilitated the discussions. Knol explains: “The onsite meetings during the pilot phase helped to make sure that Deutsche Bank really understood what BAT wanted from a technical perspective. We played an important role in bridging any gaps between the bank and BAT.” Once the team was satisfied that the pilot phase was a success, they implemented the OBO structure with Deutsche Bank in Western Europe in the second half of 2016. Stewart says: “SEPA was the catalyst to effectively deploy OBO across Western Europe and, while the payments environment is more standardized than Asia-Pacific, the number of countries involved in the roll-out brought additional complexity to the project. We had to be clear in communicating the change in conjunction with getting the necessary legal and tax sign off from all markets. Although it’s to be expected that there will be some challenges, particularly from an IT point of view, all areas of the company were actually very supportive and fully bought into the new way of working.”

Business case for OBO

The business drivers for the project were centralization, simplification through standardization, rationalization, transparency, consistency and cost/risk reduction. The OBO structure supports treasury by increasing shared service efficiency and enhancing reconciliation processes, improving bank relationship management, consolidating banks and bank accounts, reducing fees, increasing yields and simplifying liquidity structures.

“The end result surpassed our expectations,” says Stewart. “One key factor was that our stakeholders were very aware of what impact the project would have from the outset. We ensured that our treasury, procure-to-pay and order-to-cash objectives were fully aligned. All corners of the business understood the benefits of the implementation and rather than wondering why we were doing it, they actually wondered why we hadn’t done it sooner.”

Working with the business units enabled the various stakeholders within BAT to understand the value of the project. According to Knol, BAT explored additional opportunities because it was clear that treasury was a valued partner for parts of the organization, such as procurement and the financial shared service center.

This acceptance allowed BAT to continue with the OBO project and roll it out in other markets. Stewart adds: “We certainly saw this as a wider cross-functional project supporting a number of other group wide centralization and working capital initiatives, rather than looking at it solely through a treasury lens.”

Handling complexity

BAT is a large organization; to affect change within the complexity of the OBO structure meant that the team had to cooperate closely with internal BAT business units and external players. Stewart says: “There was a huge collaborative effort from Zanders, Deutsche Bank and BAT. From the bank’s point of view, it was a particularly challenging project but they did a fantastic job in making it happen. We made it clear at the outset that we needed a bank that could effectively partner and deliver to our aggressive timelines. They were able to fulfil this and benefited as the project demonstrated what could be achieved; BAT became a showcase for them. What you need is a bank that’s able to think globally, building relationships with the shared service center in Bucharest, as well as with the team in London and to coordinate across borders.”

Is there any advice BAT would give to companies considering a similar POBO transformation? Stewart says: “Companies have to decide if the structure is right for them, what are they hoping to achieve and does it fit into company-wide objectives, is the technical infrastructure robust and secure enough to support? Is the relevant technical expertise available in-house or are consultants required? In addition, it is important to have buy-in from key stakeholders from the outset particularly from a tax and legal perspective. They need to ensure they have banking partners able to effectively support a project of this scale. It’s a huge step from conducting a request for proposal (RFP) to actually implementing the OBO structure, so choose a bank with some experience in this field. A project of this scope can seem daunting but don’t be put off by complexity: in many ways, the more complex the project, the greater the benefits.”

Future plans

BAT completed the POBO/ROBO implementation at the end of 2016 and is now looking to extend the structure to other markets where there is a solid business case to do so. They intend to roll out the project in Malaysia and they are currently in discussions with the Malaysian authorities and central bank to finalize approval. In Africa and the Americas, BAT is also looking to achieve a more streamlined bank account structure using virtual accounts on a non-OBO basis. Stewart concludes: “Overall, virtual accounts have brought us huge benefits and they would also work well in the payments space particularly for payroll and tax. Considering the progress we’ve made with OBO and the TaO project, BAT is now in a very strong position from a cash management perspective to enter a cycle of continuous improvement with simplified and efficient structures providing sufficient flexibility to adapt as technology develops and the business and regulatory requirements dictate.”

Would you like to know more about treasury transformation or virtual accounts? Contact us.

BNG Bank was founded more than 100 years ago – firstly under the name Gemeentelijke Credietbank – as a purchasing association with the main task of bundling the financing requirements of Dutch local authorities so that purchasing benefits could be obtained on capital markets. In 1922, the name was changed to Bank voor Nederlandsche Gemeenten and even today the main aim is, in essence, the same. What has changed is the role of local authorities, says John Reichardt, a member of the Board of BNG Bank. He explains: “Over the past few years they have diversified. Many of their responsibilities are now independent or even privatized. Hospitals, electricity boards and housing companies, for example, were in the hands of local authorities but now operate independently. They are, however, still our clients because they provide public services.”

Different to Other Banks

To satisfy the financing requirements of its clients, BNG Bank collects money on the international capital markets to realize ‘bundled’ purchasing benefits. “And we pass these benefits on to our customers,” says Reichardt. “While our customers have become more diverse over time, our product portfolio has widened. Some thirty years ago we became a bank, with a comprehensive banking license, and this meant we could take up short-term loans, make investments, and handle our customers’ payments. We try to be a full-service bank, but then only for services our customers need.”

The state holds half of the shares and the remainder belongs to local authorities and provinces/counties. “Because of this we always have the dilemma: should we go for more profit and more dividend, or should our strong purchasing position be reflected immediately in our prices by means of a moderate pricing strategy? Our goal is to be big in our market – we think we should keep 35 to 50 percent of the total outstanding debt on our balance sheet. We are not striving for maximum profit, and that differentiates us from many other banks. Although we are a private company, we do also feel we are a part of the government,” says Reichardt.

Changed Worlds

BNG Bank has only one branch in The Hague, with 300 employees. The bank has grown considerably, mainly over the past few years. As of the start of the financial crisis, a number of services from other parties have disappeared, so BNG Bank was often called upon to step in. Now, partly as a result of this, it has become one of the systematically important Dutch banks. “From a character point of view, we are more of a middle-sized company, but as far as the balance sheet is concerned, we are a large bank. We earn our money by buying cheaply, but also by trying to pass this on as cheaply as possible to our customers – with a small commission. This brings with it a strong focus on risk management, including managing our own assets and the associated risks. These are partly credit risks, but we have fewer risks than other banks – because, thanks to the government, our customers are usually very creditworthy.”

BNG Bank also runs certain interest rate risks that have to be controlled on a day-to-day basis. “We have done this in a certain way for a long time, but in the meantime the world has changed,” says Hans Noordam, head of risk management at BNG Bank. “So we thought it was time to give the method a face-lift to test whether we are doing it right, with the right instruments and whether we are looking at the right things? We also wanted someone else to take a good look at it.”

So BNG Bank concluded that the interest rate risk framework had to be revised. “Our approach once was state of the art but, as always with the dialectics of progress, we didn’t do enough ourselves to keep up with changes in that respect,” Reichardt explains. “When we looked at the whole management of interest rate risk, on the one hand it was about the departments involved, and on the other hand the measurement system – the instruments we used and everything associated with them used to produce information which enabled decision-making on our position strategy. That is a big project.

Project Harry

Over the past few years various developments have taken place in the area of market risk. When BNG Bank changed its products and methods, various changes also took place in the areas of risk management and valuation, including extra requirements from the regulator. “So we started a preliminary investigation and formed one unit within risk management,” says Reichardt. At the end of 2012, BNG Bank appointed Petra Danisevska as head of risk management/ALM (RM/ALM). “We agreed not to reinvent the wheel ourselves, but mainly to look closely at best market practices,” she says.

Zanders helped us with this. In May 2013 we started an investigation to find out which interest rate risks were present in the bank and where improvement levels could be made.

Petra Danisevska, Head of risk management/ALM (RM/ALM) at BNG Bank

Noordam explains that they agreed on suggested steps with the Asset Liability Committee (ALCO), which also provided input and expressed preferences. A plan was then made and the outlines sketched. To convert that into concrete actions, Noordam says that a project was initiated at the beginning of 2014: Project Harry. “This gets its name from BNG Bank’s location, also the home of a Dutch cartoon character, called Haagse Harry. He was the symbol of the whirlwind which was to whip through the bank,” says Noordam.

Within ALCO Limits

“During the (economic) crisis, all sorts of things happened which influenced the valuation of our balance sheet,” Reichardt explains. “They also had many effects on the measurement of our interest rate risk. We had to apply totally different curves – sometimes with very strange results. Our company is set up in a way that with our economic hedging and our hedge accounting, we can buy for X and pass it on to our customers for X plus a couple of basis points, which during the period of the loan reverts to us. We retain a small amount and on the basis of this pay out a dividend – our model is that simple. However, since the valuations were influenced by market changes, we were more or less obliged to take measures in order to stay within our ALCO limits. These measures, with respect to managing our interest position, would not have been realizable under our current philosophy; simply because they weren’t necessary. We knew we had to find a solution for that phenomenon in the project. After much discussion we were able to find a solution: to be more reliable within the technical framework of anticipating market movements which strongly influence valuation of financial instruments. In other words: the spread risk and the rate risk had to be separately measured and managed from one another. The world had changed and our interest rate risk management, as well as reporting and calculations based upon it, had to as well.”

After revision of the interest rate risk framework, as of the second half of 2015, all interest-rate risk measurements, their drivers and reporting were changed. The market risks as a result of the changes in interest rate curves, were then measured and reported on a daily basis by the RM/ALM department. “There is definitely better management of the interest rate risk; we generate more background data and create more possibilities to carry out analyses,” Danisevska explains. “We now have detailed figures that we couldn’t get before, with which we can show ALCO the risk and the accompanying, assumed return.”

More proactive

Noordam knew that Project Harry would involve a considerable effort. “The risk framework would inevitably suffer quite a lot. It had to be innovated on the basis of calculated conditions, while the implementation required a lot of internal resources and specific knowledge. Technical points had to be solved, while relationships had to be safeguarded; many elements with all sorts of expertise had to be integrated. The European Central Bank was stringent – that took up a lot of time and work. We had an asset quality review (AQR) and a stress test – that was completely new to us. Sometimes we were tempted to stay on known ground, but even during those periods we were able to carry on with the project. We rolled up our shirtsleeves and together we gained from the experience.”

Reichardt says: “It was a tough project for us, with complex subject matter and lots of different opinions. In total it took us seven quarters to complete. However, I think we have accomplished more than we expected at the beginning. With a combination of our own people and external expertise, we have managed to make up for lost ground. We have exchanged the rags for riches and we have been successful. Where do we stand now? As well as the required numbers, we have a clear view of what our thoughts are on ‘what is interest rate risk and what isn’t’. The only thing we still have to do is to fine-tune the roles: what can you expect from risk managers and risk takers, and how will they react to this? We will continue to monitor it. RM/ALM as a department is in any case a lot more proactive – that was an important goal for us. We can be more successful, but the department is really earning its spurs within the bank and that means profit for everyone.”

In 2014, Lamb Weston/Meijer, a major manufacturer of potatoes with roots in both the US and the Netherlands, decided to expand its capacity with a new production line for its specialty products. Arranging the necessary financing provided a good opportunity for evaluating its cooperation with existing finance providers.

With customers in the proprietary fast-food chains in the quick service segment and many ‘casual dining’ restaurants, Lamb Weston is a major player in the international food market for frozen potato products. The brand is also expanding in the retail sector, particularly in the Middle East and the UK. Lamb Weston invented the Twister®, the now famous curly fries. Moreover, the company also makes Ziggy Fries, which have a flaky structure, to keep them crispy for longer, and recently also introduced Connoisseur fries, which look as if they’ve been cut by hand.

Global ambition

Lamb Weston/Meijer (LW/M) is a joint venture owned by two companies, Lamb Weston and Meijer Frozen Foods. An American company, Lamb Weston was founded in 1950 by F. Gilbert Lamb, a grower from Weston, in the state of Oregon. Lamb developed the water gun knife, a device with which potatoes can be cut into fries by water under high pressure. After later developing Curly Fries and CrissCut Fries, the company grew rapidly. The stock-exchange-listed ConAgra then took over Lamb Weston Foods* with the aim of making it the world’s biggest producer of frozen potato products. In support of that ambition, the company decided to also establish itself in Europe, leading to the existing joint venture with Meijer Frozen Foods. This Dutch potato producer started up in 1920, when Cees Meijer Senior bought a potato plant in Kruiningen and decided to sell potatoes grown in the clay-base soil of Zeeland, as of the fifties in frozen form. The family-owned Meijer company and the listed ConAgra now each hold 50 percent stakes in LW/M. The company’s turnover is about EUR 600 million per year – and they process more than 1.3 billion kilos of potatoes into high-value products.

New production line

Significantly, LW/M’s turnover continues to grow and the company has succeeded in increasing its market share in several European countries. “That’s why we want to expand our capacity,” says Peter van Wouwe, CFO of LW/M. “We’d been toying with this intention for a while and last year we decided to act on it by installing a new production line in our Bergen op Zoom factory. We already have a production line there, but we’re now installing another alongside it for our specialty products like Twister® Fries and CrissCuts®. This was a key reason for us to start looking for fresh financing.”
The expansion called for an investment of about EUR 120 million. And even though the company generates substantial cash flow, it still needed to raise the new financing. “First we wanted to explore the best way of structuring it. We’d enjoyed several years of excellent collaboration with ABN Amro and Deutsche Bank, but it’s always a good idea to revisit existing agreements to ensure you have the best possible starting position.”

Financing form

LW/M had used Zanders for the financing of an acquisition before Van Wouwe joined the company. “That collaboration went very well so we decided to get in touch again for this financing requirement,” says Van Wouwe. “We’d already discussed it with Zanders in the preliminary stages and in December 2014, when we decided to make the investment, we immediately started checking out the best way to structure it all. We set up a good roadmap and the first question we encountered was which form of financing should we opt for.”
The choice was whether or not to arrange the funding through its regular banks. “In addition to the existing credit lines extended by our banks, we decided to also examine other potential financing opportunities,” says Van Wouwe. In exploring its options LW/M decided it was wise to include both a best-case and a worst-case scenario. “A specific aspect of our financing requirements is that there can be substantial fluctuations in our results. This has everything to do with our raw material. The potato is a natural product and one year the price can be very low and the next year prohibitively expensive - sometimes varying by a factor of 20. And, of course, this significantly impacts our results and working capital. This is why we had to include a worst-case scenario; what would it mean for our results and cash flow if we had a very bad year? Any new financing would have to make allowance for such a situation, so that we wouldn’t immediately have to go back, cap-in-hand, to the bank.” That said, new financing based solely on a best-case scenario would also raise questions, thinks Sander van Tol, managing partner of Zanders: “In recent years, the company has been profitable and has earned a lot of money. So it begs the question of whether you’re not allowing yourself too much room so you can make other investments too. It’s a trade-off between how much financing you are looking for and for how long? Based on all this, we checked the flexibility of possible financing instruments and soon came to the conclusion that bank financing was the best option.”

Term sheet

Afterwards, an inventory of the banks was started up. “First, we put together a long-list of banks that might be suitable,” says Van Wouwe. “Together with our partners in the US, we looked at what would suit us the best and with which banks we could maintain a good relationship in the longer term. In this respect we are pretty traditional because we have excellent relationships with our banks. At the end of the day, particularly when the going gets tough, it’s very important that you can always get on with one another.”
After whittling down the long-list to a shortlist, LW/M invited four banks so that it could present the company’s plans and expectations, together with a forecast of cash-flow development during the coming years. “We saw that the banks were interested and, by means of a detailed term sheet, we gave them a proposal in which the terms of the financing were summarized,” explains Van Wouwe. The ensuing discussions were mainly about what LW/M was looking for in the financing and the best way to structure it. Among other aspects, the impact of regulation (Basel III) on the pricing of the financing was also discussed. In the interests of cost optimization, it was decided that the loan should be ‘labeled’ as two separate parts. One part would be for the expansion of the plant (a so-called term loan) and the other would be for the company’s working capital (a form of current account financing that could be used when the company needs it – a flexible variant). “In this way we achieved the best composition for our size and organization,” assures Van Wouwe. “Working with just one bank is hardly ideal, yet every bank that’s added to the equation makes it more complex. At the end of the day this approach, in which banks were invited to participate on the basis of the detailed term sheet, worked out well.”

The devil is in the details

Documenting the agreements in the term sheet is a detailed (legal) process and to accelerate the documentation phase it’s common practice to set up the term sheet in a very painstaking manner. “Banks want to know now what you’ll be doing in three years’ time and lay down agreements on this in the term sheet. During the next few years, for example, we want to be able to establish new entities in different countries, without constantly having to consult the bank – which could suddenly refuse us. That’s the kind of thing you want to avoid.” This is also why Zanders collaborated closely with LW/M’s external legal advisor. “That accelerated the process considerably,” says Van Tol. “What was unique about this process was the time invested in preparing the term sheet that listed all the agreements with the bank. One page can sometimes be sufficient for a term sheet, but in this case it was eight pages. And its importance shouldn’t be underestimated either, because signing the term sheet is like signing a wedding certificate – and it’s always advisable to know exactly whom you are marrying. During the documentation phase, to avoid working with irregular templates that could make the agreements less clear, we used the term sheets of the LMA, or Loan Markets Association. And in this project too it proved successful, because the devil is in the details.” Nodding in agreement, Van Wouwe remarks that it does indeed pay to negotiate the contents of the term sheets in great detail. “The LMA principles adopt a different approach – more at an international than national level. And that’s a much better fit with what we want to achieve.”

New fries

April 2015 saw the groundbreaking ceremony for the new production facility and six months later they started installing the machines. “It’s a very complex project, comprising three separate projects rolled into one,” explains Van Wouwe. “Firstly there’s the technical realization of the new production line. Then, once the line is established, we must be able to start production immediately, the employees must be properly trained and the right sales contracts must be in place to ensure that suitable sales markets have been found for the production. The third and final of these projects is underscoring the continuity of the factory. The new production line, together with the existing one, will use the same receiving area for the potatoes, despite their packaging being very different. It’s a logistical challenge, but fortunately it’s all going according to plan.”
LW/M expects the new line to start being productive in July 2016. “We’ve never carried out a project of this scale before and we’re extremely pleased that we’ve been able to secure such a good banking solution for it,” concludes Van Wouwe.

On the 18th of November Conagra announced a renewed strategic focus: “ConAgra Foods Announces Plans to Separate Into Two Independent Public Companies”.

The average car contains 3-5km of cables while a plane has more than 650km and it takes more than 1,000km for an oil platform to function. There are more energy cables around us than we realize, and they are produced to handle extreme temperatures, deep oceans, or high air pressure. One of the industry leaders in energy (and some telecommunication and LAN) cables is a French multinational called Nexans. Worldwide, 26,000 people work for the Nexans group, with yearly sales of around €7 billion.

“We have new markets that need to be equipped, and there are old markets that need to change all the installations they made 40 years ago – for example, in the US,” says Thomas Wagner, financial manager at Nexans. “But the cable industry is quite a mature market. A significant part of our sales are in Europe.”

In 2013, most sales (57%) were in Europe. But like many in the past few years, Nexans had to deal with a complicated environment, with a global market in crisis, higher bank fees, lots of tools, and – of course – regulations.

Customized matrix

In 2010, the Nexans group decided to define the key strategy for its treasury in a global project. Wagner says: “We started with a worldwide survey to see where we could improve our operations. The area of bank relationship management was quickly identified because we were dealing with more than 100 bank groups worldwide, and our subsidiaries had more than 900 different bank accounts. This number was too high for a group of our size.”

The group’s first objective was to start streamlining their banking relationships. Nexans managed the bank selection process in three steps. First of all, it prepared a cash management RFP (request for proposal) to evaluate the capabilities of the different banks. In a ‘request for quotation,’ Nexans received detailed answers from the banks and analyzed whether the proposed solutions were meeting its requirements.

For this analysis, Zanders created a customized evaluation matrix for us, with a scoring model for each bank.

Thomas Wagner, financial manager at Nexans

“Then we sent our additional follow-up questions and remarks to the banks, and they returned precisions on the previous RFP. Subsequently, we came to a shortlist, and we organized face-to-face meetings with the remaining banks. Finally, based on the selected cash management banks, we developed a global cash pooling architecture together with Zanders and started its implementation.

On the technology side, it was important for the project team to check the capacity of the bank to be able to move to Swift. We wanted to standardize and harmonize the format as much as possible.”

Rationalization criteria

The bank rationalization consisted of defining new core banking partners at the group level. “It meant that we had to reduce the number of banks and bank accounts related to that,” says Wagner. For a bank, a larger share of the wallet in the project is attractive and results in lower banking fees for Nexans. However, the number of banks was not only minimized. A trade-off was also needed to reduce the counterparty risk per bank.

Nexans used four criteria for the banks to be eligible for cooperation. Apart from the bank’s credit rating and the banking fees, a condition for the group was that the bank would become a core partner – not only for cash management but also for providing credit to the group when necessary. Also, it was important for Nexans that the bank would be able to answer the company’s technology and service requirements. Based on the criteria, Nexans ended up with a selection of global cash management banks after previously working with mainly local banks – due to a large number of mergers.

“We also needed to optimize the structure of the group’s bank architecture, in order to reduce the fees at the group level.” The main focus was on bank relationships. “Reducing the costs was an important goal, but building a strong win-win relationship with the banks was key. We therefore made the bank selection not only based on price but also wanted a footprint making Nexans able to deal with all its future business,” Wagner explains.

One of the goals was to decrease banking relationships from 100 down to 20 or 30 banks and to reduce the number of accounts to less than 600. Apart from bank rationalization, the other important objectives of this treasury strategy project were improving bank communication, establishing a payment factory and in-house bank, as well as making necessary changes to the current treasury management system.

Wagner adds: “We intend to have around 550 bank accounts, so during the project, we will close roughly 350 accounts. The bank rationalization was the cornerstone for the rest of the project. It was clear that our bank communication had to improve, and in some countries, we needed to change our outdated communication tools. Especially in Europe, with the realization of SEPA, we took the opportunity to implement new technology.”

One bank, one currency

Where Nexans really wanted to improve was on foreign exchange payments. It decided to build a bank organization that would limit cross-border payments. “Without that, we would not have been able to implement a payment factory. We need to leverage the group.” Besides that, a cultural aspect played a role too. The Nexans group was built by buying several entities spread all over the world, each with its own relationships and financial culture. Technologically, it was not possible to control the company on each level of detail.

Therefore, new technology was implemented for the payment factory and the in-house bank too. Wagner explains: “When a Nexans entity based in France, for example, needed to pay in US dollars to a client in the US, it was using an account opened in Paris, generating a payment outside of France – so it was cross-border, with a transaction fee of roughly €5-6 per payment. The new situation allows this entity to use an account located in New York. This meant the price became a domestic one. To discover this advantage, we needed help from treasury experts and found that in Zanders’ consultants. They knew that, with the new technology, one entity of the group was able to pay on behalf of the other entities. This payment factory allows Nexans Services to have one account open in each currency country and to offer services to each entity. It opens an account in the US for USD, in London for GBP, etc. In the end, we have one balance per currency.

So, a subsidiary in France paying someone in the US now happens via the payment factory. We then reduce the external fees to these flows; internally, there are only booking flows, no financial flows between the two entities. Because we have a cash pool in place, we also save money on the interest we pay our banks.

Thanks to the new bank architecture, we are now able to pay on behalf of our entities. We are a global group, so the banks must be able to follow us wherever we are. That’s why we decided to give one currency to one bank.

In a treasurer’s way

Most of the banks are now active and around 60% of the sales of the group have been covered. The project was launched in April 2011 and in August Nexans chose its banks. The implementation part, however, was much more complicated and lasted a lot longer. Wagner adds: “The finalizing part will always be the longest one. Implementation is a process that never really ends – we keep on discovering that new changes are needed. In some countries it is very difficult to do the implementation and so in these cases it’s easier to adapt the system.”

Still, in the relationship with its banks Nexans is stronger now, which leads to a more flexible and reactive behavior from the partner banks. Wagner notes: “One of the big returns on investment of this project was the fact that we converted cross-border flows to booking flows. We will have return on this investment after four or five years.”

Zanders consultant Ruud Mullens managed a big part of the project, interpreting the client requirements and, after implementation, structuring the bank relationships too. “It was important for us to have skilled resources that could help,” says Wagner. “We didn’t have the necessary internal resources and needed someone to react to certain developments and to negotiate with the other parties involved. The team that Zanders proposed to us was really pragmatic, had a strong methodology and was able to look at the project from a treasurer’s point of view. In order to improve our treasury organization the global idea had to be clear and Zanders understood that need.”

What did Zanders do for Nexans?

• Assisted in managing the bank rationalization process
• Prepared detailed RfP document, customized to Nexans’ specific requirements
• Provided an evaluation model to validate and evaluate the answers from the banks in the selection process
• Assisted in analyzing and evaluating bank proposals
• Developed account and cash pool architecture
• Followed up contract negotiations with banks
• Helped to implement the new bank infrastructure

The Netherlands’ most compact university has a prime location: adjoining the capital’s Zuidas business district and the VU medical center. The VU’s situation is unique in that the city has grown towards it. Both its collaboration with the business sector and with the medical world takes place just a stone’s throw away.

In 1992, the university had approximately 8,000 students; that number is now around 24,000. In terms of the university’s physical real estate, however, not much has been added since the early 1990s. And yet, without any appreciable increase in its accommodation, the number of students studying at the VU has tripled. Partly because of the major growth that the university has experienced, the VU adjusted its substantive vision to the future, under the motto ‘VU Amsterdam: looking further,’ and plans were drafted for expanding or modifying the campus. Since 2003 the university has been considering a vision for the campus; it was only a few years later that it made that vision concrete and the plans for the current renovations on the VU site were established. This gave rise to funding requirements as well.

The early crowd-funders

The VU was founded in 1880 by a group of reformed Protestants, led by Abraham Kuyper. They felt that the education offered at other universities was too liberal. The ties with the reformed Protestant church were strong up until the 1970s. The VU was in fact founded using an early form of crowdfunding: donations from reformed Protestants throughout the Netherlands financed the education at the VU. Fundraisers went door to door asking for donations, carrying green collection boxes bearing a picture of Abraham Kuyper—not only a minister and politician but also known as the founder of the Anti-Revolutionary Party. Radboud University was financed in a similar manner, but by the Catholic community in the Netherlands.

Its original source of funding means the VU has a special structure. While other universities have their roots in the Education Act, the VU is a Dutch stichting (foundation), called the Stichting VU-VUmc, with the university (VU) and medical center (VUmc) as divisions. Other universities such as Leiden University and Utrecht University also work with medical centers, but as separate legal entities and not within a single foundation. “This structure makes it more difficult to arrange funding in the way that other universities do,” says Hanco Gerritse, financial director at the VU. “The VU and VUmc operate as separate entities but must always take each other into account in their financing. In the Netherlands, universities have the possibility of getting funding from the Dutch Ministry of Finance. However, this method of funding, called ‘schatkistbankieren,’ was less attractive in this instance. We therefore chose to work with Zanders, so that the consultants could support us in finding the best financing solution.”

As first university

Zanders first had to investigate how the VU could finance its accommodation plans. Alongside possibilities of bank financing, the VU was also advised to look into a loan via the European Investment Bank (EIB). Gerritse says: “The VU did not have any long-term capital. It was not something we were set up for. Most of the knowledge required we gained from Zanders. And they played an important role in the contact with the EIB. The cooperation fits us like a glove; it is a real partnership.” And the fact that the EIB emerged as a financier is special, says Gerritse. “What makes it so special is that we are the first university in the Netherlands to receive financing from the EIB. Due to both the creditworthiness and nature of the EIB, the pricing is far below those of commercial banks. And they still have more funds available, for the Netherlands and for education in particular.” The construction project involves a total investment of some €460 million. The maximum amount of funding the EIB will provide is half of the investment by way of combined project financing.

Most of the knowledge required we gained from Zanders. And they played an important role in the contact with the EIB. The cooperation fits us like a glove; it is a real partnership.

Hanco Gerritse, financial director at the VU

At other universities, schatkistbankieren and/or loans from commercial banks play a large role in the financing; the VU itself contributes the rest of the investment sum for this project, generated from cash flows and its own resources. These cash flows come from the government, based on the number of students and graduates (the first flow of funds), in the form of research financing (second flow of funds), or originate from the European Union and businesses (third flow of funds). “The buildings used to be owned by the Ministry of Education, but since 1995 the universities own their buildings and sites and are therefore responsible for their accommodation, maintenance, and investments as well,” says Peter Wemmenhove, head of planning & control. “The VU’s main building was built at the beginning of the 1970s and is now in need of renovation. This modernization also falls within the scope of the financing.”

Seven Projects

The projects that fall within the project financing are:

• The O|2 building (due for completion in 2015)
• The Campus square (University building NU.VU)
• New power turbines in the VU’s own power plant: Energy center
• Renovation/upgrade of Main building
• Car park under the O|2 building
• Upgrade of the Medical Faculty building
• Changes to the Mathematics and Physics building

Long-term partnership

Wemmenhove started at the VU in May 2012. The project had already been under way for six months at that point; the information memorandum was being prepared and sent out. Gerritse was appointed financial director one year later. Not long before that he had held the same position at healthcare institution Cordaan, where he also worked on a financing project with Zanders. “We see the EIB’s financing as a show of confidence in our plans from a triple-A-rated European institute,” says Gerritse. “After all, it is a public agency and cannot invest indiscriminately. By investing in our plans, the EIB is endeavoring to achieve the objectives agreed on between the European countries.” The VU and EIB did not only discuss the financial angle; the EIB also cooperated closely with VU’s accommodation department, the Campus Facilities Organization (FCO), and of course the VU medical center.

Zanders also played a big role in that, especially because the process was complicated due to the complex legal structure of the foundation.

Hanco Gerritse, financial director at the VU

The most expensive sports fields

Gerritse proudly explains what buildings are being built with the funds raised: “It is a combined project to build a number of new buildings and overhaul existing buildings. The new buildings will be the O|2 building and the new university building NU.VU. We are also improving the sustainability of all our buildings. For instance, in our own power plant we use seasonal thermal energy storage (STES) to cool or heat the buildings. In the main building, the shell will remain intact and we will open up the many small rooms into larger, brighter open-plan offices. All of which meets the needs of our lecturers and students.” This means more flexible workspaces as well as more opportunities for contact between lecturers and students. “The building must be up to date for at least the next 15 years,” adds Wemmenhove.

Connections between the businesses in the Zuidas district and the university are also being stimulated. “The most expensive sports fields in the Netherlands are across the street,” says Gerritse. “They are owned by the municipality but we are going to trade that land to accomplish a more explicit connection with the city. The sports fields will then be moved to behind our site. This puts us closer to the Zuidas district and brings the businesses even closer to our campus.” So there will be even more cooperation between university, business, and the government—something the government is also eager to encourage.

The VU recently started a major research program in cooperation with the University of Amsterdam and ASML. Some of the laser technology used by the semiconductor manufacturer was developed at the VU. Gerritse adds: “That is a really fine example: conducting research together, using the technological expertise from within the universities and then together finding applications for this knowledge. It has yielded a great deal for Amsterdam. Investing in a strategic partnership makes it easier to achieve such results.”

Phased approach

The VU’s real estate investment is a multi-year plan that runs to 2030. Underlying the multi-year plan is the thinking that the university must find more points of connection with the city: the VU, looking further. “The gates must be open,” says Gerritse. “By establishing the connection with the Zuidas district we can give the entire urban district a boost. That is the larger, urban planning vision behind our plan.”

Within the time span that the European Investment Bank provides funding, seven projects have been defined, both new builds and renovations of existing buildings. These projects comprise the combined project financing for the first phase. The total multi-year plan is executed in different phases. The reason for this phased approach is mainly to limit the risks linked to the investments. “We will examine the situation during every phase,” explains Wemmenhove. “How many students we have, whether the government financing is changing, how business is developing in the Zuidas district—these kinds of factors can prompt us to adjust the course of the plans.” The current investments are still in the first phase and are expected to be completed in 2018. Residential facilities, retail units, and movie theaters are also included in the subsequent phases.

What did Zanders and the VU do together as a
project team?

• The contact with financiers (EIB, commercial banks, and the Ministry of Finance), including negotiations
• Cooperation with FCO (campus facilities organization), VUmc, and Van Doorne (lawyer)
• Drafting of information memorandum, including model and multi-year projections and RfPs
• Selection of financiers
• Structuring of the financing, tailored to the organization and its current financial statements

Better positioned

The funding from the EIB also reflects another trend in the academic world, specifically that universities are becoming increasingly international. The competition between universities is no longer confined by national borders or even by European borders. In the international realm, the city of Amsterdam will also profit from the developments at the VU. “More than half of the master's curricula are in English,” explains Gerritse. “As a university and as a city, you are competing on the international market for higher education. The fact that we have good facilities puts us in a better position in that market as well.” In that sense, too, the financing from the EIB is an affirmation of its confidence. “Compared to a commercial bank, the EIB looks at a financing plan very differently, looking far beyond cash flows and revenue forecasts,” says Koen Reijnders, consultant at Zanders. “Probable questions include, for instance: how will the envisioned building function and how sustainable is it? The EIB only starts looking at the financing component when it’s satisfied from both the engineering viewpoint and the perspective of education economics.”

“We are investing in the Zuidas district,” says Gerritse. “When the VU moved here it was surrounded by farmland that was being sold and bought. Since then, this land has grown into a unique area. The VU had to investigate the right way to develop the space available and, with this plan, we have succeeded in doing this.”

In the Netherlands of the eighteenth century, a diverse range of regional funds was set up to reduce the risk of setbacks in certain professions or in vulnerable regions. Two national life insurance companies, De Nederlanden van 1845 and Nationale Levensverzekering-Bank, over the course of the nineteenth and twentieth centuries, took over many of these funds. In 1963, these two large insurance companies merged, creating Nationale-Nederlanden. Due to the strong financial position acquired by this new company, it continued to grow abroad, particularly in the United States. As of last year, the products supplied by the Dutch insurance company RVS, which was acquired in 1984, also form part of the Nationale-Nederlanden brand. Nationale-Nederlanden now has over five million private and commercial customers who are using a broad package of financial products and services, such as pension plans, life insurance, non-life insurance, and income insurance. Nationale-Nederlanden has recently also started offering bank savings products and mortgages.

Uncoupled

The idea of starting up a bank arose in response to market trends observed in recent years: the life insurance market continued to shrink, while the bank savings market, on the contrary, was expanding. Prior to this, Dutch insurance companies had been able to offer tax-related and wealth creation products for years. In 2008, a new legislative proposal eliminated the monopoly held by insurance companies on such products. This opened up a very lucrative market for banks. At the same time, Nationale-Nederlanden, which formed part of the huge ING enterprise, did not have the independence required to provide such bank savings products. Then the European Commission ruled that ING, with its government support, was required to uncouple its insurance business from its banking operations. This meant that offering bank savings products became an attractive possibility. At the same time, it made it possible to offset the increasingly contracting life insurance portfolio with the new bank savings portfolio.

“While we had a financial background as an insurance company, we did not have a banking background,” says Peter Verberne, CFRO of the Nationale-Nederlanden Bank. “Banking is completely different from insuring. The complexity associated with banking requires proper management. This is why we asked Zanders to advise and guide us in this area. For example, when the time came for us to apply for permits from De Nederlandsche Bank (DNB), after we had developed our bank savings products. “The earning model for a bank requires you to have sufficient size in order to be viable and operate with a profit.”

The consultants [from Zanders] developed the bank’s risk management system for us. This made the complex risk management subject matter very transparent and tangible without detracting from its complexity.

Peter Verberne, CFRO of the Nationale-Nederlanden Bank

Volume Ahead of Profit

The collaboration with Zanders started approximately two years ago. In June 2011, DNB granted Nationale-Nederlanden permission to start up a bank. Finally, after making provisions for the legislated capital requirements, the company opened up its banking savings products counter in the third quarter of 2011. The new bank commenced by offering golden handshake-related products and products for the annuity market.

At that point, Nationale-Nederlanden, as a bank, was also required to start offering credit products on the Dutch market. This resulted in the creation of the Nationale-Nederlanden Bank’s mortgage arm in the first half of 2012.

Verberne says: “This is an entirely different discipline from collecting savings. We therefore prepared a number of acceptance criteria and adjusted the risk management system to incorporate the risks that apply to the granting of loans. The program that emerged from this has been used for providing mortgages since the third quarter of 2012.” The management of the core mortgage lending processes was contracted out to a third party.

“However, as an entity, you must look after the risk management process in-house,” Verberne continues. “The financial risk management, the credit risk management, the operational risk management, compliance – we outsource as much as possible, but the core functions are carried out within the bank, including risk management in its broadest sense.”

When we took our first steps on the banking market, volume was a key factor. “The earning model for a bank requires you to have sufficient size in order to be viable and operate with a profit,” Verberne explains. “This is why we wanted to offer regular savings in addition to bank savings, and this is why we will be introducing two additional regular savings products in the near future. Zanders also designed the risk management systems here. The volumes that the Nationale-Nederlanden Bank is aiming to achieve with these savings products are significantly higher than with bank savings. We are aiming to become a serious player on the savings market within a short period of time. The basic principle remains that we will continue to offer simple banking products. In other words, straightforward banking with what-you-see-is-what-you-get products.”

Transparent Products

What is the situation with respect to the new competitive position in relation to ING? Verberne explains: “Our mortgages and savings products mean that we already compete with ING. We pursue an independent pricing policy in this respect. Furthermore, Nationale-Nederlanden is one of the best-known and strongest financial brands that is simply offering a far more extensive range of services.” “By leaving out the bells and whistles, we can offer a more competitive rate.”

“In addition, there is currently also a trend for increasingly simple products,” says Yvonne Sijm, a Zanders consultant. “Especially private customers opting for wealth creation products, for example for their pension, can now obtain such products not only from their insurance company, but also from their bank. At a bank, this is far more transparent because, in contrast to an insurance company, you do not pay a risk premium. Private customers opt for these transparent products, and this is why you are now seeing a shift to more straightforward banking products.”

The insurers of pension and life insurance products are most affected by this trend. The non-life and term life insurance sectors still have a clear raison d’être. A financial institution is required to provide transparency and to be straightforward, but at the same time, the customer wants security. What the customer is prepared to pay for the risks the company takes therefore also comes into play. “This is a difficult issue,” says Verberne. “You have to offer customers an interest-rate refixing period, which affects your own interest rate risk. This also applies to mortgages. While you can add a lot of bells and whistles to these products, they all carry risk, and these risks come at a price. On the other hand, by leaving out these bells and whistles, we can offer a more competitive rate.”

Risk Horizon

With the help of the Nationale-Nederlanden’s strong name, the bank must take its planned powerful steps into the banking market. Life insurance policies were traditionally primarily sold via intermediaries. This also applies to bank savings and mortgages, which, in part due to the fiscal aspects of these products, are true financial advice products. In terms of the regular savings products, Nationale-Nederlanden will primarily focus on direct channels.

“The targeted bank savings customers include all Dutch citizens involved in wealth creation,” says Verberne. “For example, these customers may have a maturing annuity policy or want to terminate this policy, but it can also include customers who received a golden handshake when they were dismissed and who want to put it aside or convert it into a payment stream. In terms of the mortgages, this includes all Dutch citizens who are referred to us via their mortgage broker. And for the regular savings products, it can be anyone who wants to save.”

According to Verberne, Zanders has supplied the tools needed to ensure the new entity will work in practice. “This sometimes entailed very practical matters that are the same in the insurance world, but that have been given a different name in the banking world. In addition, the risk horizon considered by an insurer is longer than that of a banker. This can cause misunderstandings, but I think that we have taken a solid step in this area.” The basis for this will be established later this year through a merger with a key component of the Westland-Utrecht Bank. As such, the banking market will have one more player, with a well-known name and a competitive capacity, no matter what happens.