Source: KPMG Corporate Treasury News, Edition 46, August 2015
Numerous financial scandals in the past which were associated with financial fraud have driven many organizations to review their bank account structures and bank account management processes. An effective bank account structure and a sustainable compliance system, jointly ensuring transparency and control for cash management activities have gained significantly in importance.
This increasing compliance awareness was confirmed by a recent survey about bank account management conducted by our team for the BNPP Cash Management Conference with 48 participating organizations. In this survey we asked how many bank accounts the respondents use worldwide. More than 60% of the respondents said that they had bank accounts ranging in numbers from 251 to more than 1000. Moreover, over 90% of the respondents recognize the need for a reduction of their bank accounts.
Pitfalls of a decentralized bank account management
The main reason for the large number of bank accounts and complex structures is a decentralized bank account management. Local CFO’s might favor a local bank and there can be numerous reasons for which it might be legitimate from a local subsidiary point of view. However, this clearly leads to various challenges that are almost impossible to overcome if bank accounts are not managed centrally.
Most importantly, a central liquidity overview or even the pooling of bank account balances is difficult and more costly to establish. One might argue that the bank accounts with significant balances are part of a cash pool and closely monitored. However, how can this statement be regularly validated if a company has no complete and reliable overview covering all the bank accounts of the group?
Additionally, it is not possible to ensure effective control over the entire payment release process in decentralized setups due to the typically high number of payment systems that are used to connect to the various banks. This in turn increases the risk of fraud or bribery. Needless to say, a higher number of bank accounts and interfaces to different payment systems have a significant cost impact. Even if the eBanking-system is offered by the bank for free, there are internal costs associated with maintaining interfaces and administrating both system and accounts.
The idea of a centralized Bank Account Management tool
Treasurers are increasingly recognizing the need to take on the group-wide responsibility for bank account management and to end decentralized processes by having a central policy in place that is supervised and monitored. Our Experience working with many clients has shown that it is not enough to just have a central policy in place without the possibility to track the adherence. We therefore agree that the use of professional Bank Account Management (BAM) tools offered by several TMS, ERP and specialized BAM suppliers to track compliance is crucial.
Following advantages of a BAM tool are pre-dominantly stated by corporate treasurers as also indicated by the survey results:
• Sustainable monitoring of the usage of corporate-wide defined cash management banks
• Mapping of workflows for bank account management, including checks performed to ensure that only bank accounts are opened with a legitimate reason and no longer required bank accounts are closed
• Prevention of mis-use of bank accounts, i.e. bank accounts used for illegal activities
• Real-time single source of truth on company-wide bank accounts, bank services and signatory rights, including bank-account related documentation
• Overview of group negotiated general terms, conditions & documentation (e.g. clauses) to check locally granted conditions by bank branch
If treasurers acknowledge the fact that a central bank account management process supported by a BAM tool can provide significant value add one might wonder why approximately 80% of the surveyed companies indicated that they have no dedicated Bank Account Management (BAM) tool in place or rely so far on Excel or Access. One reason is that corporate treasurers perceive a limited availability of standard software as also indicated by the survey result.
Perceived barriers to overcome
While there is only limited availability of true electronic bank account management (eBAM) systems, nowadays several BAM tools are available and typically fulfill the requirements of corporates. The scarcity of eBAM systems that allow to transmit bank account and signatory data electronically via XML with the bank, is mainly due to the fact that only one European bank so far offers the possibility to exchange messages electronically according to the SWIFT readiness bank certification. American banks have taken pole position in accepting XML messages for bank account and signatory data.
However, treasurers should make one step at a time when setting up efficient bank account structures and bank account management processes that are effectively controlled. The usage of eBAM is definitely helpful to further streamline processes but it is clearly not the first step and not the most important one in order to set up and sustain efficient bank account structures.
Best practice approach to put an efficient bank account structure in place
Based on our experience, corporates that have successfully established and maintained efficient bank account structures follow a similar path:
1. Initial group wide reduction of bank accounts as part of the implementation of a payment and collection factory: There are various examples from companies which have managed to reduce their number of bank accounts from over a 1000 down to a low three-digit number or even two-digit numbers in nowadays driven by the use of virtual bank accounts. In case that group-wide cash management banks have not been selected yet, a due diligence, as part of an RfP phase to select the future global cash management banks, has to be done prior to the Payment Factory implementation.
2. Sustainable implementation and monitoring of efficient bank account structures through a centrally managed bank account approval process: It cannot be stressed enough that the consequent implementation of bank account policies plays a decisive role for the long-term success. Contradicting the market assessment of the survey respondents, there are several tools available which offer, unlike any Excel or Access databases, the necessary functionalities to track the adherence to the bank account management policy.
3. Implementation of eBAM: Once the first two steps have been successfully implemented, treasurers might look to further improve bank account management processes by enabling electronic message exchange with banks. It is our expectation that in the near future more and more European banks will offer electronic message exchange within the country-specific legal boundaries.
4. Measurement of bank fees and bank performance: In our experience there is no other comparable cost position in a corporation which is as large and lacks transparency as much as bank fees. This lack of transparency would be most likely unacceptable for any purchasing or controlling department. Obviously, the tracking of bank fees is rather difficult to deal with, however, this should not stop companies from performing a bank fee analysis. And again, the first step towards measuring bank fees and bank performance is an efficient bank account structure and the existence of a central database covering all bank accounts and the respective terms and conditions. Not surprisingly, most of the BAM software providers work feverishly on a solution for measuring bank fees and have this as their top priority on their development road map.
The installation of an efficient bank account structure is essential to the design of transparent and secure payment processes as well as for the prevention of fraud. As experience has shown it is not sufficient to merely compile a bank account policy. On the contrary, the centralization of the payment processes is required by means of a payment or collection factory and the consequent adherence to the bank account policies through an adequate bank account management tool. Unlike the prevailing view among our survey participants might suggest, there are indeed several BAM tools available which cover the requirements of the clients.
Author: Thomas Mehlkopf, Manager, firstname.lastname@example.org
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