Compete or collaborate? For those in the transaction banking industry that are striving to find the right balance between doing things on their own or partnering with someone else, ‘co-opetition’ – a blend of competition and co-operation – may be the answer.
The Banker brought together transaction banking representatives to take a barometer reading of the industry as a whole, discussing common themes they encounter in their roles. One area of consensus was that the industry could do more to co-operate on issues where banks do not compete, particularly when it comes to regulation.
Top issues for the participants include the impact of regulation, the changing needs and expectations of clients, and what new risks could be emerging that will later impact the industry.
Cautious optimism
The mood among the participants was cautiously optimistic and there was also a sense the industry is getting more competitive. This year could be described as the transition year, bridging the recuperation from the financial crisis with looking ahead to future growth.
Rajesh Mehta, head of treasury and trade solutions for Europe, the Middle East and Africa (EMEA) at Citi, said it had been a “fabulously interesting year”, spent managing the aftermath of the financial crisis, managing productivity and managing regulation.
The impact of regulation was a concern for participants, however. Jennifer Boussuge, EMEA head of global transaction services at Bank of America Merrill Lynch, said: “There has been a convergence this year of so many regulations”, including Basel III, the Foreign Account Tax Compliance Act and the Dodd-Frank Act. She added that these are pushing a number of financial institutions to refocus “who they want to be and who they can be with”, with some choosing to withdraw from a particular product or country.
In recent years, many global banks have restructured to adapt to the post-crisis environment. On the question of how 2014 is different compared with other years, Sue Dean, JPMorgan’s EMEA head of transaction services, referred to the structural changes that JPMorgan had made to its business in 2012. “We have rationalised our business model based on the needs of our clients, and this year we continue to drive forward that recalibration to show the client one face of the firm,” she said.
Client centricity
With client-centricity now a consideration for all the major transaction banks, the discussion around regulation moved on to how it impacts on clients. In previous years when transaction bankers have talked about regulation, the tone of the discussions has been one of uncertainty. There were concerns about how the regulations would be specifically implemented and what the unintended consequences would be. Also, there were fears about regulatory arbitrage because jurisdictions around the world are on different schedules for introducing their own version of global regulations such as Basel III. And with introducing industry-wide initiatives, it was felt by some in the industry that any bank that moves first could be at a disadvantage.
The industry has moved on from this sentiment and the impact of regulations on banks to focus instead on the consequences for clients. Christian Westerhaus, global co-head of client products and solutions, global transaction banking, at Deutsche Bank, gave an example of how his bank has been interacting with its clients on the topic of the European Central Bank’s (ECB) guidelines on intraday liquidity. “While the ECB guidelines on intraday liquidity reporting haven’t come out yet, there is a lot of good practical dialogue with clients based on their real needs going beyond the aspect of mere regulatory compliance," he said.
And speaking more broadly, Mr Westerhaus added: “Conversations with clients have changed. Before it was about regulations that banks had to comply with but now, with regulations such as the European Market Infrastructure Regulation, corporates themselves are also being directly impacted."
Call for standardisation
Banks have had a longer time to understand the regulations, but for many corporates the rules can be confusing. There have been challenges with both the speed of compliance and how the regulations are being interpreted. Many in the industry wish for greater standardisation, consistency and simplification of the regulations. Even with the Single Euro Payments Areas across the eurozone, countries’ interpretations of the deadline extension have been different.
Banks have progressed from adjusting to the regulations themselves as institutions, to discussing regulations with the clients. Now they are looking to do more at an industry-wide level. A good example of this is with Know Your Customer (KYC) and anti-money laundering (AML) rules, which have received increased attention recently as regulators have imposed harsh penalties on banks that have flouted them.
KYC is a prime example of how the industry can collaborate on an area that is non-competitive. By sharing data on suspect institutions or individuals, there is scope to reduce the cost burden of compliance. Third-party initiatives such as the Society for Worldwide Interbank Financial Telecommunication's (Swift’s) KYC Registry are seen as a positive step.
Although KYC specifically relates to vetting who banks do business with, there is also a drive toward banks knowing their customers better in terms of how they can help them with their customer relationship management.
Know your customer
Steve Box, head of trade and receivables finance for Europe at HSBC, echoed the theme of client-centricity by advocating putting the customer at the “front and at the heart” of what the bank does is a priority. And when it comes to knowing customers, the customer data – which is needed as part of complying with KYC and AML regulations – will become a commodity of value, he said.
On the topic of customer data, Dominic Broom, EMEA head of treasury services at BNY Mellon, said: “Using the wealth of transaction data that we process to deliver value to our clients is at the core of our proposition.”
Regulation and data management are just two of the issues that transaction banks are juggling. The burden of regulatory compliance has grown in recent years, and at the same time banks have to keep innovating. Participants commented that the industry is good at compliance once regulations become mandatory, but could be better at anticipating and understanding how the next wave of regulations would emerge and take shape.
Matt Tuck, head of financial institutions and co-head of international at Barclays, said that in the current environment “there is a unique opportunity to innovate and at the same time we have to work together [as an industry], particularly on regulation.” However, “it is easy to say things, but it is much harder to do them”, he added.
Mike Winn, head of cash, global transaction services, at RBS, said: “Standardisation is a great platform for the industry, even if the regulators are the primary drivers of that.” However, he noted, that “standardisation is always non-standard” as there are always variants of the same regulation when it is applied in different jurisdictions.
True innovation
When it comes to collective action with the industry coming together on certain initiatives, it was commented that true innovation only occurs in cycles of about 10 years. There was also a sense that the industry could do better at having a collective voice with the regulators at the formation stage of regulations.
In some ways, transaction banking got tarred with the same brush as other parts of the banking sector in the aftermath of the financial crisis. There is a feeling in the industry that transaction banking is little understood by the politicians that have sought to clamp down on banks in recent years. Policy-makers may understand the retail banking market, and large international corporations have lobbyists that can defend their interests, but there are many small and medium-sized enterprises that do not have the same kind of representation.
The impact of Basel III rules on the ability of banks to finance trade, for example, has been a concern in recent years. If, however, banks make the case to the regulators it may appear that they are purely acting out of self interest. In terms of how regulations and industry-wide initiatives will impact clients – such as smaller corporates – it was felt that banks could bring clients into the discussions with regulators at an earlier stage.
Working together
When it comes to working together on regulation, Mr Box said: “We need far greater involvement of the corporates.” To embrace forward-looking propositions, Mr Box added that all parts of the industry need to collaborate. It is not just about bringing together other financial institutions or regulators, but the other players involved in the value chain. In the case of trade solutions, it is important to collaborate with shipping agents, for example, said Mr Box.
Banks’ ability to innovate, especially in an era of increased regulation, remains a topic of interest for the industry. Mr Broom compared banks with technology companies in Silicon Valley and said banks’ historic ability to leverage technology has lagged behind the more dynamic approach of tech start-ups.
Mr Tuck agreed: “[Banks] run the risk of being left behind. We need to partner with [innovative tech companies] and get close to them otherwise we will lose.”
When it comes to innovation, there was a feeling that banks need to overcome their typically conservative approach and think more like the innovators that can be found in the world's hi-tech hubs. This is a paradox, said Ed Smith, head of global transaction banking at Lloyds Banking Group, because of the constraints that banks have as regulated entities. “We all want certainty in the regulation. We are in a risk business. We need people who can handle the risk,” he said.
Talent search
Employing the right talent was another key issue for the transaction bankers. And getting the right geographical mix was deemed as being just as important as finding the next generation of tech-savvy innovators or people who understand risk. With emerging economies representing a significant portion of global economic growth, transaction banks face the issue of building a workforce that reflects that.
There was acknowledgment that a new breed of talent needs to be brought into transaction banking. Some banks already have schemes to foster this, such as programmes that hire recruits from the military to capitalise on their understanding of risk. Others may host internal innovation competitions, setting aside funds to invest in the winning idea.
For those considering a career in banking, transaction banking is not the logical first choice. “If they think about banking they do not think about transaction banking [as a career choice],” said Ms Boussuge. She added that there are no degree programmes that are tailored specifically to the transaction banking industry. Mr Mehta noted that although transaction banking is not yet a degree programme, one university in Hong Kong is offering a module on transaction banking.
Going underground?
There was also discussion about the risks that could be emerging in the current regulatory environment. There is a concern that one of the unintended consequences of the KYC regulation is that some transactions will be driven underground. Large banks are turning away customers for fear of falling foul of the regulations and having to face the wrath of the regulators.
These business decisions are not necessarily based on the risk profile of the customer and such decisions are hindering the industry’s wider ambitions of serving the real economy. This is partly because the current solutions for distinguishing between a ‘good’ customer and a rogue customer are not sophisticated enough and banks are erring on the side of caution.
As large Tier 1 banks close accounts, it is likely there will be other banks in the layers below that are willing to take on these customers and transactions. And there are concerns that legitimate transactions that are not able to flow on the stable banking system, such as migrant workers’ remittances, will flow on unstable channels instead. Another consequence of the increased burden of compliance and monitoring of customers is that it forms a barrier to new entrants to the industry.
Focused efforts
Because of the cost of regulatory compliance, banks are also having to be more selective about where in the world they are willing to do business. In the past, banks may have had the freedom to choose where they wanted to do business. Now they have to be much smarter about where they focus their energies, according to Mr Winn. “The cost of capital is forcing us [as an industry] to be much more focused on our strengths,” he said.
System stability was another theme discussed, one that will become more prominent in transaction banking, according to the participants. Ms Dean said that she expects system stability increasingly to be on the agenda of regulators, with banks having to prove they can withstand the effects of the changing economic and regulatory environment.
On the topic of system stability, Mr Winn pointed out the pressure for system stability is not just coming from the regulators; system stability is something that the clients will demand of their banks. “The clients won’t let us get away with [system instability] – the commercial driver will force banks to fix that,” he said.
In their closing comments, the participants at the roundtable were positive about the prospects for the industry and emphasised how the challenges of regulation also provide many opportunities as well. There is a balance to be found between stability and the freedom to be flexible, as well as finding the right balance between collaboration and competition.
