Global-scale operations

We all know that the planet isn’t getting any smaller – but it does seem that way, particularly in the world of payments and cash management (PCM). Fifty years ago, banks were mainly local with some operating at a national level. Twenty years ago, banks were mainly national with some operating at a pan-regional level. Today, more banks are moving to being regional or even global in order to survive in an environment that requires scale, particularly in PCM.

Those remaining in the niche markets they have carved out are finding themselves focused on what they do best to obtain a comparative advantage. Usually, this focus is on providing differentiation in the way they serve the customer – and leaving the rest, including clearing, settling and other core PCM business, to those still in that market.

Globalisation is making its mark on the banking world – just like most other markets. This is evidenced by the consolidation through centralisation or outsourcing of back-office processing, the consolidation of financial institutions and the way the regulators in the different markets are interacting with one another.

At HSBC, we believe there are three external elements that are driving decision-making in financial institutions as to their long-term strategy of whether or not to play in the PCM space – and to what degree. Those elements include the regulatory landscape, the pace and impact of technology change and the requirements to meet each institution’s individualised customer service proposition. All three are being transformed at a rapid rate and must be viewed in context.

Influential factors

Globalisation seems to be happening to us, whether we like it or not – but what should we be looking at as we seek to stay competitive? Each of the three elements – regulation, technology and customer requirements – are forcing change upon us. This article will examine each of these in terms of globalisation and the influence it is having on the way we do business in the PCM world.

Regulation – what a word to get people worried! Globalisation is impacting on how the regulators operate. We have seen how much interest the UK and European regulators have been paying to the Reserve Bank of Australia’s decision to regulate the credit card interchange level (MIF). Regulators around the world are reviewing the implications of Cheque 21 on the processing of paper through the payments system in the US as all eyes are on Europe with regard to the new legal framework and the drive towards a single euro payments area.

The European regulators are having a massive impact – and not just on the way things are happening in Europe. The impact will be felt far beyond the borders of those that operate in the eurozone.

European single payments markets

At its plenary meeting in December 2004, the European Payments Council (EPC) defined its roadmap for the Single Euro Payments Area (SEPA) from 2004 until 2010. Its focus, and that of its members, is the definition of the core credit transfer and direct debit pan-European payment instruments, together with a debit cards framework, by the end of 2005, ready for launch in 2008.

While considerable progress has been made with the definition work, it is clear that much remains to be done before the payment rulebooks are finalised in December this year. Throughout 2005, the European Commission (EC) and European Central Bank (ECB) have kept up the pressure on the EPC and its members to deliver in accordance with the roadmap, through a series of speeches and media announcements. Behind the messages is the clear, at times quite explicit threat that these bodies will use their regulatory powers to force the banking industry to introduce radical change and achieve the single payments market.

The ECB’s focus has been principally on the establishment of pan-European standards through the ‘Eurosystem standards task force’. In addition, as a result of concerns that the banking industry was defining its payment instruments without due concern for the needs of its customers, the ECB has liaised with a number of large corporates and the European Association of Corporate Treasurers to create the ‘SEPA User Expectations’ document in May 2005.

The EC’s proposed ‘New Legal Framework for Payments in the Internal Market’ directive sets out a harmonised legal framework for payments across the EU. While the high level aims of the directive are helpful to the creation of a single market, early drafts prompted much comment from the banking industry. It remains to be seen to what extent the commission has listened to the industry when the final draft directive is published in October this year.

If left in its earlier form, the directive could well provoke some far-reaching changes in the European payments industry and its customers. In fact, the directive introduces an element of extra-territoriality through its coverage of payments into and out of the EU. In addition to the directive, the payments industry is also looking forward to the impact analysis that the commission has promised will accompany the legislation.

Whatever the EC’s cost/benefit analysis reveals, it is unlikely to be positive in the short term for banks, as they invest in order to change their systems in preparation for SEPA. The impact here is therefore not just on those operating inside the euro zone.

To back up the rhetoric of the commissioner’s speeches, the directorate-general internal market released a ‘Success Factors for the Internal Market’ document in May this year. Flagged as a first draft and a ‘floating of ideas’, the ‘incentives’ within the paper covered issues such as standards, interoperability and good governance – all initiatives which must be addressed in order to achieve the single market. The question is, will the industry be allowed to devise market-led solutions for itself, or will the commission regulate these in order to give the industry a ‘regulatory push’? The commission may turn its attention to a formal draft of the ‘incentives’ after it has delivered the new legal framework directive.

The year 2005 is clearly a ‘make or break’ one for SEPA. Will the EPC, with its focus on its 2005 and 2008 deliverables, convince both the EC and the ECB that it can deliver SEPA without further regulation? Or will the regulators, with their focus clearly on the SEPA ‘end-game’ of a European single payments market and pan-European consolidation of payment infrastructures by 2010, give the industry a firm ‘helping hand’ by regulating the market? Whatever the answers to these questions, the impact will be felt beyond the euro boundaries – this is something that anyone operating beyond their own country or region needs to be aware of.

Standardisation through technology

From where we sit today, it’s hard to remember that, as late as the mid-90s, technology was viewed by many as a barrier to advances in transaction processing. Indeed, those of us with longer memories will recall that in the early 1980s – a time of mammoth, room-filling mainframes – it was quite a hard sell to convince a treasurer to get a PC.

Today, most of us bask – or at least work – in the glow of a wall of flat-panel data, instantaneously updated. We benefit from technology-driven and assisted programmes and procedures designed to reduce risk and fraud and move away from proprietary products as a result of standardising messaging languages, such as utilising XML. The new offerings display an alphabet of acronyms – FileAct and RosettaNet, TWIST and CRG. SWIFT and SWIFTNet. There’s even a PEACH: the EBA initiative that is pushing toward the goal of building a pan-European automated clearing house.

In the end, there are three core components of the client-to-bank interface: file format, the method of connectivity and security such as public key infrastructure (that combination of software, encryption technologies, and services that enables an enterprise to protect the security of its communications and business transactions). To achieve truly open and global standards in transactional banking, all three must be agreed and utilised. Having global standards will open up the market and force those operating at a local, national or regional level to compete with global players.

With the Sibos financial services conference on the minds of many, it’s appropriate to take the pulse of standardisation through technology by looking at one of the up-and-coming programmes, SWIFT’s MACUG – the Member Administered Closed User Group. Just last year, it was all relatively new, with corporate customers typically electing to ‘watch this space’ with interest. In the short time since, things have changed, as interest grows across the globe and adoption rates keep pace.

Back in July 2004, an HSBC survey of 227 organisations world-wide showed a high level of interest, suggesting the channel was poised to enter the mainstream. At the end of June 2005, 92 banks had registered to provide a corporate MACUG (covering FIN, FileAct or both). This compares favourably with just 41 banks at the end of 2003 and 69 banks last year. Another good indicator is the number of corporate-to-bank MACUG FileAct relationships. At the end of 2004, there were just nine corporate-to-bank links in place. There are now 35, which connect 12 corporates to 15 banks. MACUG is a good example of a global offering that changes the interactions between a customer, its suppliers and the banks.

What do customers want?

However they do it, the new product offerings such as MACUG offer the corporate community – our customers – the opportunity to benefit from the standardisation of the client-to-bank interface across a range of financial services.

And like any good and robust customer-focused solution, it’s multi-talented: while the initial demand has been witnessed in global transaction banking, it can be used to support derivatives, securities, trade and treasury activities. Providing a single, secure and resilient window to our banking partners – regionally or globally – enables operational cost savings through a combination of factors: the rationalisation of proprietary banking channels, reduced infrastructure and operational support costs and improved STP. Globalisation, and the international competition that it engenders, necessitates just such cost saving measures to remain competitive. While cost savings are an imperative, customers expect their bank to deliver not just a functionality-rich, but also a fully customisable solution, in order to manage that all important resource – time.

At the end of the day, all of the giga-power of technology, the reams of regulation and the front to back-office processing have one goal: giving customers better service (however ‘better’ is defined, and by whom).

Having examined some of the boundaries and benefits of regulation, and taking into account the promise and current power of technology, what do customers of HSBC’s Global Transaction Banking (GTB) services want in the near and mid term? And what can they realistically expect? In a few words: information, backed by knowledge, at lower cost.

Is the information accurate and up to date? How are instructions sent? Have those instructions been accepted and properly executed? What advice has been received? Is the settlement final? The list goes on, including items such as value date, charges taken by the intermediaries, quality of the data received, how that data is used in reconciliations, and impact on liquidity.

At HSBC, we focus on the relationship. Maintaining a successful relationship – let’s call it keeping the customer happy – means understanding their business as much as we understand ours. And always giving them more.

For a bank that operates globally, that means advantages, such as the capability to own the end-to-end payment chain. It means offering a one-stop approach that typically enables finer pricing, sharper focus on transaction completion and fulfilment, later cut-off times and improved enquiry resolution capabilities.

Finally, there’s strength in diversity – of clientele and, therefore, the experience that we can bring to bear. The global nature of HSBC means we can share knowledge we learn from one part of the globe with those we have relationships with in other parts. There’s no better definition of globalisation.

Cath Henry, Senior Product Market Manager, HSBC Global Payments and Cash Management.