Banks operating in global transaction services (GTS) are challenged by rising costs, shrinking margins and encroaching regulation. Emerging markets, and in particular Asia, are becoming increasingly important to the sector. The Banker asked leading GTS figures about their strategies for maintaining profitability and enhancing competitiveness. Edited by Anindita Ghosh

The panel

Karen Fawcett - Group head of global transaction banking, Standard Chartered

Eric D Kamback - Executive vice-president and CEO, BNY Mellon treasury services

Andrew Long - Head of global transaction banking, HSBC

Paul Simpson - Global head of treasury and trade solutions, Citi

Werner Steinmüller - Head of global transaction banking, Deutsche Bank

Susan J Webb - Executive vice-president and product executive, global core cash management, JPMorgan treasury services

The issues 

- maximising profitability

- regulation concerns

- the importance of Asia

- winning market share in Asia

- the competitive landscape

- challenges for the next 12 months

With costs soaring and margins shrinking, how are banks maximising profitability in global transaction services (GTS)?

Karen Fawcett: This is a lower-margin environment. What we are seeing now - which we have never seen before - is margins shrinking on both the asset and the liability sides of the balance sheet. [At Standard Chartered] we are not seeing costs soaring. We have done a huge amount of 'hubbing' globally - we now carry out 80% of our operations from Chennai and Kuala Lumpur - which brings our unit costs down significantly. Also, the volumes of underlying business are very healthy: asset and liability growth rates are easily above 20%. So it is a story of enhanced productivity, but with the knowledge that it will pay off when margins come back.

Eric D Kamback: It [rising costs and shrinking margins] is certainly a dilemma faced by smaller and regional banks - particularly those in Europe and the US that have seen their revenue streams depleted by stringent rules and regulations. For these banks, the immediate need is for collaborative partnerships with specialist providers that will allow them to adapt technology to suit market specifics while remaining competitive and profitable.

Andrew Long: This year, transaction banking returns are coming back as economies recover and the negative drag of falling rates has now tailed off. Having single platforms helps to manage costs and drive efficiency, as does introducing economies of scale.

Differentiating [one's company from competitors] on the basis of service is the key to retaining customers and improving profitability. Strength in the growing emerging markets is also critically important.

Paul Simpson: Our approach [at Citi] is to prioritise and resource against our strategic client base and key market and industry opportunities. As we drive revenue initiatives, we also deploy a rigorous expense-management regime. Over the past two years, we have grown our business by developing more industry-specific solutions, invested in our largest growth markets and developed a consistent and integrated global service model.

Werner Steinmüller: Rising costs and shrinking margins are not affecting all transaction banking providers to the same degree. Innovative market leaders that have a sizeable international network, invest in technology and are vigilant with costs continue to do well. Strategically offering product and technology innovation boosts revenues and cost-efficiency. Those banks that do not take their focus off their customers in a time of squeezing margins will be considered trusted partners by their clients.

Susan J Webb: I see three primary areas where banks are maximising profitability in the GTS arena today. One is the introduction of value-added services that deliver critical support to clients in key areas, and the integration of those services, across a buyer's lines of business. The second is going green wherever possible. The third area is leveraging partner banks and networks to provide a complete suite of services to clients, reducing the necessity of having to build new solutions from scratch.

Is the GTS marketplace over-regulated?

Ms Fawcett: Trade is one of the lowest-risk products for a bank. It is largely self-liquidating and you can count the number of losses on one hand. But there are insufficient data points concerning losses to build a statistically significant risk profile, so regulators treat it as a risky product. The returns on regulatory capital for trade are extremely low - the returns on economic capital could be five times higher. That mismatch is inevitably pushing prices up for clients and reducing the quantity of global trade finance available. Trade is important, not as a tool for speculation but to support underlying exports and imports and to create employment in locations ranging from small developing countries to large industrialised nations. It is about having the right prudent regulation to support long-term economic and employment growth.

Mr Kamback: While regulation is essential, many smaller banks are becoming increasingly overburdened by compliance initiatives, which prevent them from focusing on core business lines. This hampers their ability to respond to the increasingly complex demands of their corporate clients. As a result, it is becoming apparent that only larger institutions with size and scale, or smaller banks that partner with them, can hope to stay profitable in the GTS space.

Mr Long: A more prescriptive approach to regulation is already apparent and takes many forms. In the payments industry, for example, much of the focus has been on money laundering. It is important for the banking industry and regulatory bodies to engage positively in the development of such regulation. In contrast, real concerns are emerging around the Alternative Investment Fund Managers Directive [a European Commission proposal for more regulation of funds not covered by Europe's existing Undertakings for Collective Investment in Transferable Securities, or UCITS]. Regulators must not strangle the stability of transaction banking.

Mr Simpson: Overall, we believe regulation is being developed with the interests of clients in mind. The global level of regulation in the GTS market has increased, which is creating intense pressure on all participants - financial institutions and clients. Banks need to engage more proactively and collaboratively with regulators - as is happening in the debate around Basel III [the proposed reform of the Basel international banking rules] - ensuring that future regulation meets policy objectives. This will minimise the risk of unnecessary constraints on the industry's ability to support global trade and economic growth.

Mr Steinmüller: Regulation is essential, but must be enforced in a way that is not cost-prohibitive. Cash and trade are inherently lower-risk businesses and those banks that have more sophisticated and tailored risk models should be competitively advantaged. In this respect, capital requirements should be sufficiently differentiated to reflect these lower risk levels. The Basel Committee has made a significant step towards appropriately recognising the low risk of transaction banking balances compared with regular wholesale funding. However, we need to continue the dialogue with regulators to ensure that transaction banking can maintain its important role in providing a platform for a well-functioning, globally integrated economy.

Ms Webb: Regulation has always been a factor in GTS. Because of recent economic events, the marketplace is likely to become even more regulated. Banks need to continue to work with regulators to help establish a solid understanding of the first and second order of consequences of regulations before they are enacted.

How important is Asia to your future strategy?

Ms Fawcett: Asia is at the forefront of our strategy, accounting for more than 70% of [Standard Chartered]'s profits. The crisis prompted countries in Asia to increase domestic demand: China is the obvious example. [Asian] countries are beginning to spend on their own behalf rather than producing to send to the Organisation for Economic Co-operation and Development [OECD] markets, and trade volumes within Asia have grown strongly, bringing the total almost up to pre-crisis levels. Asia is not separated from the West yet in terms of dependency but in the next few years you will see the separation increase enormously.

Mr Kamback: While the US continues to provide growth opportunities, it represents a more mature market than other parts of the world, Asia being the obvious case in point. The relative growth of Asian markets in comparison with the rest of the world, and the opportunities this represents, make the Asia-Pacific region an integral part of [BNY Mellon's] growth strategy moving forward.

Mr Long: We have identified a number of global trends related to Asia, which are key to [HSBC's] GTS business strategy. Firstly, emerging markets will continue to grow faster than the developed world; China's economy will grow five times faster than the West this year. Secondly, over time, world trade will grow faster than global gross domestic product [GDP]. In this regard, the 'south-south' trade corridors [linking Asia, Africa, the Middle East and South America] are increasing strongly.

Mr Simpson: [Asia] is paramount. More than 50% of world trade is now intra-Asia, GDP growth for most Asian economies exceeds that of the OECD, seven of the top 25 cities are in Asia, and China has become the second largest economy in the world. [At Citi] we are helping our corporate and financial institution clients in Asia as they expand within and beyond the region, and we are working with public sector clients as they seek solutions to serve their growing economies and increasingly urbanised populations.

Mr Steinmüller: Most Asian countries have increased interest rates, while in the US and eurozone the interest rates are near zero. It is desirable to have a significant business in Asia to benefit from the higher interest rates.

Asia is essential in terms of sourcing for many European and US corporates, and is also growing in importance as a distribution centre as the local economies continue to perform well. This is something that is also being driven by the growth in intra-Asian trade as the region's dependence on the West diminishes. In this respect, offering trade and cash products that facilitate trade into and out of the region is key, as is catering to the needs of Asia's rapidly growing domestic corporates and local banks.

Ms Webb: Asia is growing at an average of 10% a year. Since regional banking markets are still emerging, and the transactional banking business is less efficient in Asia than in Europe and the US, [at JPMorgan] we have greater opportunities to grow market share by leveraging our global technology-based solutions.

What is the best strategy to win market share in Asia?

Ms Fawcett: First, the ability to maximise access to these markets - it is very difficult to get licences and many countries are trying to restrict foreign access. Also, it takes a long time to learn how business is done in these countries. Second, you need a central operating model, because costs will increase hugely if you try to build up in each country separately. Companies in Asia are on a high-growth path and it is more about managing growth. So this, combined with the complexities of the region, means that you really cannot afford to 'dumb down' for Asia and must have your best capabilities in place.

Mr Kamback: With technology playing an increasingly important role in the delivery of treasury services, maintaining a strong level of technology investment is particularly important to our growth strategy for Asia. Strength commands a great deal of respect in Asia - financial strength, technological strength and strength in terms of demonstrated ability to navigate today's increasingly complex regulatory environment.

Mr Long: [HSBC] follows a consistent strategy for building market share in all five regions where we operate. We are focused on providing seamless solutions for cash management, trade, custody and fund administration. The critical part is delivering it consistently, both globally and in all Asia-Pacific countries. Only then can we properly service clients with transaction banking requirements across Asia and effectively join them globally.

Mr Simpson: Asian clients seek a partner with local presence [in the areas] where they do business today, and where they plan to expand tomorrow. With local presence in many countries in Asia, [Citi is] supporting the aggressive growth of 'local champions' moving beyond their home markets to go global.

Mr Steinmüller: Economies across the region are now very interconnected. Markets such as China, India and Indonesia will all need a wider range of banking services as their middle classes grow and domestic financial services become more sophisticated. In the trade business, the focus is very much on financing; having sufficient credit appetite to support local clients is essential. Coupling local expertise in each country - something that can only be achieved by recruiting specialists in each key market - with a global platform and a consistent approach across the region is also crucial.

Ms Webb: [At JPMorgan] we are going beyond the traditional business centres of Hong Kong, Singapore and Australia, and expanding our presence throughout south-east Asia, as well as in India and China. We have found that working with our partner banks in the region to offer a wide range of network services is essential because of Asia's large and disparate market.

How is the competitive landscape evolving in GTS?

Ms Fawcett: It has been very steady for the very large players. On the custody side there are different models - the three to four providers that are able to do custody in more than 40 markets, and then everybody else that performs it in one country and has sub-custodians elsewhere. We are seeing strong demand from clients based in Asia for the former - more on-the-ground services and direct interaction with institutions that have strong on-the-ground capabilities.

Mr Kamback: Increasing working capital pressures, combined with economic, market and regulatory forces, are encouraging consolidation. The 'technology gap' between larger specialist institutions and smaller regional and mid-tier banks is growing. Rather than consolidation, we believe that this increasing divide is giving rise to a new banking partnership model that is led by the local bank manager. We are calling this model the 'manufacturer-distributor' model, and it is predicated on the concept of banks being either 'manufacturers' of banking services and products or 'distributors' of such services and products to their local client base.

Mr Long: All aspects of transaction banking are becoming more competitive following the financial crisis as clients look to reduce their exposure to a perceived risk from any individual bank.

Balance sheet strength, global connectivity and a measurable improvement in customer service will help the better banks survive, while others will drop out due to the demands for sustainable investment. The best-placed banks will be well-capitalised global providers, with strong presence in the emerging markets of Latin America, India, China and the rest of Asia and the Middle East.

Mr Simpson: The competitive landscape will probably be shaped by the emerging drivers of the global economy: globalisation, digitisation and urbanisation. The next wave of growth will see established multinationals continue expanding into emerging markets and 'local champions' from high-growth countries opening up new corridors of flows between Asia, Africa and Latin America.

Worldwide, urbanisation is driving city administrations both to reduce costs and to improve the way they serve their citizens. Digitisation is an enabler of this growth and competition will increasingly come from non-traditional players such as technology providers, [electronic] card providers and mobile network operators.

Mr Steinmüller: As banks realise the benefits of transaction banking, with the great risk-return profile and the excess liquidity it generates, the industry is once again becoming attractive for those with adequate credit appetite, scale, reach and preparedness to invest continually in systems and processes to remain profitable. However, while there is a handful of global banks that fit this profile, many others are realising the difficulties involved in staying profitable and are therefore focusing on niche areas and/or entering into partnership agreements with specialists where necessary.

What will be the single biggest issue in GTS for the next 12 months?

Ms Fawcett: The biggest issue is making sure that new regulations boost global trade flows and help our corporates rather than hinder their growth. Secondly, we are not earning much on cash. So the single biggest issue is finding other ways to be rewarded for cash management. In some countries there is resistance to using fees, but as an industry we have to get over that, because otherwise we will be doing our clients a disservice in the long term.

Mr Kamback: With the banking sector under ever-increasing scrutiny, regulatory compliance will continue to be a major issue over the coming months, though especially so for smaller and regional banks, which will struggle to reconcile the increasing cost of data and capital management with growing corporate demands for global-standard technology and innovation.

Mr Long: Economic and equity market growth, and increasing trade flows in emerging markets, represent a significant opportunity for transaction banking, tempered by increased regulations, which are pressuring returns as greater risk, compliance and operational controls are needed. In addition, outstanding, globally consistent client service is something that we see as the one thing that can create long-term competitive advantage in the industry.

Mr Simpson: The single biggest issue for the banking industry is also the single biggest issue for our clients: uncertainty. It is not clear where the global economy is going in the coming year. There is also uncertainty relating to regulatory change and the impact this will have on financial institutions and their clients. Staying close to our clients and helping them navigate this uncertainty to achieve success regardless of the environment is our top priority.

Mr Steinmüller: The growth of financial supply-chain solutions remains the biggest issue for transaction banking practitioners. However, while this is something we have been talking about for several years, it is now emerging as a genuine generator of business and revenues, and will stay at the top of the industry agenda for some time. Additionally, the prospect of a persistently low interest rate environment will pose a huge challenge to the industry.

Ms Webb: The biggest challenge facing the global transaction services business in the next year will be finding ways to enable clients to respond nimbly to, and take advantage of, rapidly changing regulatory environments around the world, as well as managing risk in general and maximising revenue. We are continuing a dialogue with our clients on how the regulatory landscape is evolving and what those changes will mean for their businesses.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter