No one can deny the difficulty of getting on-boarded by a bank. This is even more true when you are a fund (whatever the type of fund). Due to increased caution, fear of reputational risk, the need to be hyper-selective to prevent huge fines, more stringent KYC and AML rules, and unmet profitability on fund customers and especially Private Equity Funds, banks are becoming obstacles to the alternative funds and the funds administrator’s business, at the risk of paralyzing an industry that is lagging behind in terms of digitization.
Technology is vital to improve data sharing efficiency, accuracy and reliability
In a recent excellent article by Shanu Sherwani, who encouraged private equity funds to move quickly on the path of digitalization, we understood that it was high time to wake up the consciousness. Paradoxically, we have the impression that private equity funds are investing in high technology without being digitalized themselves. Yet I can only corroborate this alert (see article AGEFI November 2021 – Luxembourg). The wake-up call could be painful if we don’t want to change anything. Yet no one can argue with the benefits of technology in terms of efficiency, security, internal controls, productivity, and reliability. Isn’t it obvious? Investing in the digitization of processes is beneficial and virtuous.
Fight against money laundering
It is obvious and no one will dispute it that the fight against fraud and money laundering remains a priority which has obliged the regulators to reinforce the regulatory arsenal, of which the KYC requirements (i.e., “Know Your Customers”) are only the most familiar part for the treasurers of companies or (alternative) funds. These rules, which aim at prudence and the fight against the danger of fraud (i.e., KYC and AML), have been added to time and time again, at the risk of becoming extremely burdensome for any banker, costly and a source of fines in case of non-compliance. This explains why banks, especially the so-called “systemic” banks, are so cautious. Paradoxically, some rules can hinder or prevent doing business. It can become counterproductive. Banks have therefore reviewed their strategies for on-boarding clients, sometimes to the detriment of certain categories, such as hedge funds. The second reason for this more restrictive selection is the objective of concentrating on clients with the highest potential (and lowest reputational risk), and therefore often the biggest fish. The third reason is related to the second one: the low degree of automation (and the high manual nature of transactions and payments) increases the cost for the banks and at the same time increases the risks (operational and fraud). The last two reasons are independent of KYC and therefore are two factors that the customer can influence. I think it is therefore possible to at least act to increase one’s chances of being on-boarded by a bank. The selection by the bank is strict and requires the client to be stricter in the choice of his banking partners and to define a clear and appropriate strategy. We believe that these KYC/AML rules will only get stronger. The EU has announced a review of these rules in the near future.
How to facilitate bank on-boarding?
It is precisely by automating operations with the bank, by establishing a banking connectivity through a secure channel, such as SWIFT, that we will facilitate the execution of payments and the repatriation of bank statements, to automate the accounting reconciliation. It sounds magical and yet so simple. Corporate treasurers are used to this approach. In addition, a company always adopts a banking relationship strategy to avoid dispersion and concentrate the flow of transactions with its bankers. The problem with hedge, private equity or alternative funds is the relatively low deal flow (compared to a corporate), which reduces the profitability opportunity for the bank. This brings us back to the crucial question of the client’s profitability in relation to the risks and energy the bank devotes to it. The paradox is that alternative funds investing in high technology are also resistant to treasury financial technology. The final element is to hire a treasurer (even part-time) to reinforce and professionalize the banking relationship. They are used to this type of relationship and know how to optimize it. The recipe is therefore far from being complicated or magical. It is also virtuous in that it considerably reduces the risks on both sides, to the banker’s great delight. Setting up a “bank single gateway” makes it possible to secure flows and automated reconciliation reduces risks and time spent. More dynamic cash management becomes possible and, on top of that, reporting is improved. This is made easier by the fact that native SaaS technology exists (e.g., FENNECH, STP, A352, Hazeltree,…) and that alternative funds can outsource to treasury professionals without disrupting their IT systems or incurring implementation costs. Testing a specialist and doing a pilot is the best advice I can give. The result is guaranteed, and your banker will see you in a completely different light. Treasury should not be entrusted and left to accountants, with all due respect to this profession. The solution exists and only needs to be tested.
To believe that it is all about more fees is wrong
Some alternative funds naively think that the solution will come from simply paying more fees to bankers. This is obviously not true. The industry with its “super returns” has forgotten the basics: a bank account must be profitable for a banker. Negative interest rates are starting to hurt. Currency volatility is also becoming an important element, not a secondary one, as margins erode. The industry continues to perform well, and this hides the problems that are wrongly considered as secondary. The tree hides the forest. But the problem is there. Some fund administrators have decided to become banks or similar, believing this will solve all their problems. We will see that it is obviously much more complicated than that and that there are common sense solutions and a more coherent and focused banking strategy that allow to be more efficient. You must select your partners more efficiently and strategically. The mistake would be to not approach treasury and the banking relationship carefully. Digitizing the treasury function would fill many gaps and prevent many on-boarding problems.
François Masquelier, CEO of Simply Treasury
Disclaimer: This article was prepared by François Masquelier in his personal capacity. The opinion expressed in this article are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (i.e., EACT).