As increasing regulation spawns greater competition, banks would do well to reconsider their business models – many may find that partnership is the best route for their business. By Tom Isaac.
Since the arrival of the euro, competition between banks in the EU has increased dramatically. The foreign exchange market consolidated very quickly and now, in commercial banking, the same level of competition is occurring between the pan-regional European banks.
To add to this, corporate clients are becoming increasingly demanding and are asking for more in terms of global reach and information timeliness. At the same time, regulators continue to demand greater transparency and efficiency, forcing banks to invest heavily just to comply not only with the Single Euro Payments Area (Sepa), but also with the Markets in Financial Instruments Directive (MiFID) and Basel II. So just at the moment of maximum competition – which demands innovation – discretionary spend is being reduced.
Dual view of payments
This confluence of events is causing a paradigm shift in the way in which banks view payments. The outcome will result in two types of banks – those that invest heavily to make payments a core competency and those that foster partnerships to shield themselves from the ever-changing regulatory environment.
Today, banks are differing in their timetable and approach. Some banks have not yet grasped the strategic importance of the regulatory competitive landscape, while others are keenly aware of it. Some see it as an opportunity to change the business model while others view it as a significant threat and have described situations where as much as 30%-40% of their technology budget is being spent on Sepa for a reduction in revenue. Some are investing heavily but have not yet decided on their business model.
Difficult decision
Making the decision that payments processing is no longer a core competency is a difficult one. Often the cost base of the payments infrastructure is embedded in general ledger systems, making it difficult to analyse the impact on cost/revenue dynamics – not to mention the emotional attachment to payments. But as the timeline gets closer, the regulators start to force the pace and the issues become clearer, we believe that many banks will find it is in their best interest to develop partnerships.
By forming partnerships, banks will be able to focus on their core competency that of serving their customers and markets by better understanding the credit associated with their clients and providing them with the services they need.
This will be similar to what has already happened in both custody and trade processing, where banks have exited these business lines and looked for a partner that had the scale to continually invest to keep up with the changing environment. Citigroup is in a unique position to enable banks to focus on adding value for their domestic clients. We accomplish this through providing pan-regional solutions that protect banks from connecting to the infrastructure and providing real-time information to the end client – especially to deal with the real change of the low-value, cross-border domestic flows across Europe.
White labelling
For non-European banks, while the old reciprocal correspondent banking relationship has been outdated by the euro, the need remains to provide non-European customers with cost-efficient cross-border euro clearing services for low- and high-value payments and timely reporting. These banks will be protected from the shifting Sepa requirements if they white-label clearing and information services, so they won’t have to worry about staying in touch with all of the regulations but just keeping close to one provider across the eurozone. An increased number of non-European banks that use CitiDirect, our internet-based electronic banking service, and Swift capabilities to access our US dollar clearance product, are now using the same communication portals for their euro services.
Cross-border products
Citigroup is offering either white-labelling or connection to our core cross-border euro clearing capability with a combination of dollar/yen/euro payment and cheque handling. We believe the corporate client of a regional bank in Europe will want to choose from a suite of products that includes intra-Europe payments, real-time information and automated clearing house capability that Citigroup is in a position to deliver.
While Sepa and the shifting European regulatory landscape presents banks with many changes, with that change comes an opportunity to better serve clients. Taking a fresh look at the business model will enable banks to consider new partnerships, thus reducing infrastructure costs to get the connectivity and product capability required to upgrade their services and meet their clients’ needs.
Tom Isaac is managing director and head of Europe, Middle East and Africa client relationship management: banks, at Citigroup Global Transaction Services.
