Sibos reveals the true picture of the transaction banking world

For a while now, the conventional wisdom has been that investment banking is struggling while the transactions business is booming. But as usual, reality is more complicated than the conventional wisdom and currently the global transaction services (GTS) division is facing as many headwinds as the markets divisions.

As Sibos kicks off today I expect to hear many tales of woe about the transactions business – interest rates are absurdly low, putting pressure on deposit-heavy models; price wars are raging and margins are razor thin; economic growth in the bright spots of the world, such as Asia and Latin America, is slowing; regulations are getting tougher and the technology challenge is too vast and expensive for anybody but the largest global players to seriously contemplate.

Small wonder, then, that Sibos chose as its three big themes for this year’s meeting:

1. Regulation: challenges of implementation and identifying new opportunities.

2. Operational excellence: improving efficiency through innovation and collaboration.

3. Worldwide shifts: changing global dynamics and regional trends.

It is a self-evident truth that with banking reform the best time to do it is under boom conditions when the cost can be absorbed by growth in profits. But, in fact, reform always takes place after a crisis and so has to be done  under tight economic conditions.

Tough task ahead

Transactions banking revenue pools are expected to grow at 7% a year between 2011 and 2015 but even so banks face challenges in complying with the new regulations, upgrading their technology and still leaving shareholders smiling at the end.

In the case of the regulations centred around tax, sanctions and money laundering (the Foreign Account Tax Compliance Act [Fatca], anti-money laundering, know your customer), banks are getting to a place where they almost have to ask the regulator’s permission to take on a new piece of business. And if, like Fatca, the regulation is driven by the US authorities, the local regulator may not even know the answer. Or the local regulator may take a different view on disclosure and leave the bank stuck in the middle.

This is the kind of slightly surreal world banks now find themselves in and I will be discussing this with both international and regional bankers at a Sibos session on Thursday (Global Regulations, Regional Perspectives. September 19, 9.30am local time).

With extra regulatory costs and pressure on margins, banks are naturally looking at their cost base and how they can use technology to be more efficient. But as the global head of trust and securities services for Deutsche Bank, Satvinder Singh, comments in a report: “Technology does not create new business; it facilitates it – a distinction that has been somewhat lost in recent years as demands for speed and efficiency have increased.”

The danger is that if the basic business model is flawed, installing new technology only multiplies the errors. With the arrival of so-called big data and the cloud, the risk of getting carried away on a technological high – and coming down to earth some time later with a big bump – is ever more present.

With the help of an excellent panel, I hope to give big data a bit of a reality check in a session this morning (Big Data: Big Deal. September 16, 9.30am local time).

Opportunity search

So where are the business opportunities? Obviously some are to be found in those changing global dynamics and regional trends – the third theme of Sibos. A number of recent research papers have shed some light on this subject. 

A paper called Clash for Cash from Oliver Wyman debunks the idea that only established GTS players can manage the huge cash piles built up by Asian corporates. “There is an untapped opportunity for banks with no or subscale transaction banking offerings to compete for excess cash … [using] … their corporate advisory relationships to introduce structured deposit products or asset management capabilities to corporates,” it says.

Swift’s own white paper on Africa payments – Insights into African Transaction Flows – discusses how the regulatory constraints mentioned earlier can drive new business opportunities in Africa. At present, the role of the US dollar in Africa is growing rather than shrinking with banks in North America receiving 40% of the payments sent by Africa but only 9% of the commercial flows. These financial flows relate to both African trade with the rest of the world as well as intra-African trade. But the more know your customer and anti-money laundering regulations, operated to US standards, start to cause real pain, the more room there is for African banks to grab the business.

Finally, on the business upside I will be chairing a panel to discuss the issues raised in the World Payment Report 2013 from Capgemini and the Royal Bank of Scotland (September 16, 11.00am local time). Apart from updates on non-cash payment trends and Single Euro Payments Area, this will include discussion on innovation within payments acquisition.

Hopefully every Sibos delegate should come away with one or two bright ideas to improve their business.

Brian Caplen is editor of The Banker.