Regulation will remain at the forefront of transaction bankers' minds in the coming year, while the SEPA harmonisation in Europe will bring additional challenges. However, there is plenty of optimism about, particularly in emerging markets, a survey of senior professionals finds.

The panel

Alex Caviezel - Head of treasury services in EMEA, JPMorgan

Werner Steinmüller - Head of global transaction banking, Deutsche Bank

Naveed Sultan - Regional head of global transaction services, EMEA, Citi

Karen Fawcett - Group head of transaction banking, Standard Chartered

Brian Stevenson - Chairman of global transaction services, RBS

Alan Verschoyle-King - Head of treasury services, EMEA, BNY Mellon

Transaction banking emerged as a stable, successful business line for well-capitalised global banks during the financial crisis, but the landscape is changing. The big players in the market are adapting their strategies as they strive to stay competitive, and looking to strengthen banking partnerships and establish new relationships with local, mid-tier banks rather than going it alone in uncertain times.

Regulation remains at the forefront of bankers' minds in 2011, according to The Banker's survey of senior global transaction bankers, with Europe a particular concern. Some bankers remain sceptical that the regulators' vision of a harmonised Single Euro Payments Area (SEPA) can be achieved in its current form, despite the fact that the SEPA project is very much a reality. And as the Basel III reforms loom on the horizon, banks are trying to pre-empt the impact that new regulation will have on their business. Trade finance has already been highlighted as a casualty, with smaller banks getting priced out and larger banks facing higher costs in an already shrinking market.

The issues 

- Top priorities for 2011

- Opportunities in the marketplace

- Migration to SEPA in Europe

- Financing trade flows

- Clients' concerns

However, opportunities remain. The Banker's survey respondents also identify successful cross-border operations with emerging market countries as a new growth area for them and their clients. It is likely that transaction bankers will have to work more closely than ever with their clients to respond quickly in this new environment.

What is your biggest priority for 2011?

Alex Caviezel: The implications of regulatory changes will have a seismic impact on financial institutions of all shapes and sizes in the coming years, and working closely with our [JPMorgan] clients to manage that impact is our priority for this year. It is our focus to articulate these challenges and provide solutions to address them, as the banking community wrestles with the implications, while still delivering to clients. We will continue our focus on collaborating with our banking partners for the new environment during 2011.

Karen Fawcett: We [Standard Chartered] are sticking to the same strategy [as in 2010]: doing more with our current client base. We have relationships with many very large clients and see opportunities to do much more with them. That can be with broader product ranges – we have expanded into areas such as equities, for example – and making sure we are using our liquidity to enable our clients to grow.

Over the past two years, we have expanded into new markets and added new product capabilities, such as custody in Africa and the Middle East.

And as Asian clients expand rapidly into new markets, we are working to put in place strong alliances to be able to provide services in places such as Kuwait, Saudi Arabia and north Africa, where we have received a licence to set up a representative office in Libya.

Alan Verschoyle-King: For BNY Mellon, our biggest priority – and indeed our core competency – is to engage in collaborative partnerships with our clients to provide services that relieve them of what we would term 'unnecessary' activities. This allows them to focus on what they do best, and therefore better service their own clients. Through partnerships, we have shown remarkable growth in the past few years, and we expect this to continue into 2011.

Werner Steinmüller: We are focused on intensifying internal connectivity within [Deutsche Bank] and making smart, strategic decisions in terms of investments. Last year we completed the purchase of a significant part of ABN Amro's commercial banking activities in the Netherlands and we are working hard to realise the opportunities there.

Brian Stevenson: The market is going through fundamental change due to a combination of factors – low interest rates, post-crisis regulatory initiatives, new technologies and competition. Our [RBS] biggest priority is to make sure that we are equipped to respond to changing customer needs, and translate them by providing real insights into business solutions. Demonstrating innovation, commitment and strong global credentials will be important.

Naveed Sultan: Our [Citi] clients are focused on growth and building sustainable business models to fuel expansion while taking risk and other environmental concerns into account. Whether they are looking for strategic alternatives into or out of growth countries, financing their supply chain, developing effective clearing strategies, navigating capital markets or understanding the regulatory and economic environment – our top priority is ensuring that we offer products and services to help our clients succeed.

Where do you see opportunities in the marketplace?

Mr Caviezel: The financial crisis has given banks the impetus to redefine their roles in the market and to focus on what they do best. There is no longer any room for non-core activities, as demonstrated by emerging regulation and the expectations of analysts, let alone the objectives of bank management teams. This opens an opportunity for banks to work with specialist financial institutions to provide their end customers with services they no longer wish to invest in themselves. Again, building on bank partnerships will remain critical this year.

Ms Fawcett: Asia, the Middle East and Africa are being seen as buoyant economies. While they are not yet the size of Organisation for Economic Co-operation and Development [OECD] markets, the growth rates are staggering, and sustainable at 5% to 8% a year, compared with 2% elsewhere. What is most interesting is the emergence of new growth corridors. In the first 11 months of 2009, China-Africa trade volume reached almost $115bn, a 43.5% year-on-year increase, according to a central government report released in Beijing at the end of December.

Mr Verschoyle-King: Insourcing: after much industry talk, it is finally happening. Clients have realised that although they need to offer transaction banking services to their clients, they do not necessarily need to undertake the processing work themselves. In addition, we are working to create or acquire industry infrastructure to allow us to service the market more effectively.

Mr Steinmüller: Regionally, Asia is extremely important for [Deutsche Bank]. We have been steadily growing our presence in the region over the past years. There will also be opportunities in the Middle East, Latin America and eastern Europe.

I would also say that the importance of technology in transaction banking shows no sign of abating. It will continue to shape the industry and offer opportunities for banks to differentiate themselves.

Mr Stevenson: Based on developing trends, we see a broad range of opportunities in the market. These include the development of liquidity cash-optimisation solutions from more mature markets such as the US and western Europe to the vibrant emerging markets; better connectivity for our clients; more efficient usage of working capital; and more use of bank-agnostic channels continuing to improve risk-management from a client's viewpoint.

Mr Sultan: Our clients are searching for the next wave of growth – global companies are going local and local companies are going global. Established multinationals continue expanding into emerging markets and 'local champions' from high-growth countries are opening up new corridors of flows between Asia, Africa and Latin America. As our clients expand into new markets, we must be able to support them, providing access, visibility and risk mitigation to a degree never seen before.

In the payments arena, 2010 was set to be a decisive year, but total migration to SEPA has still not occurred. What is the future for SEPA?

Mr Caviezel: At one stage during 2010, the survival of the euro itself was more of a debate than SEPA – a further irritant to a project already hampered by the effects of the crisis. That being said, the European Commission has published the proposed text for a regulation on euro credit transfers and direct debits, which is welcome news. We [JPMorgan] fully support the regulatory drive to migrate national automated clearing house schemes to SEPA standards, though the text as drafted raises some serious challenges to both banks and end users.

We believe that, in implementing the regulation, the banking industry has a responsibility not to create 'mini-SEPAs', particularly if the regulation is approved as proposed, as part of its self-regulatory commitment to deliver SEPA.

We are concerned that the commission may be setting itself up as a standards body and a scheme-management entity by reserving the right to set and change the technical standards as it sees fit. We consider this to be the role of a payments-service provider/scheme-management entity and not of a regulatory institution.

Mr Verschoyle-King: The continuing challenge for SEPA is that it is an industry-led initiative, but the industry struggles to see what SEPA's true value proposition is. As a result, there is no great 'client pull' or 'service-provider push' for SEPA to be embedded, and this may remain the case – despite pressure from regulators and politicians – until the benefits are better understood.

Mr Steinmüller: The lack of a firm end-date was a hindrance to the take-up of the new [SEPA] standards. Now that this has been secured, both bank and corporate preparations will undoubtedly accelerate. We will also see preparations speed up at a national level, as those countries yet to ratify the Payment Services Directive [a European Commission initiative to harmonise payment services across the EU] do so in order to ensure that a common legal framework is in place in time for the decommissioning of local clearing systems to start.

Mr Stevenson: Turning SEPA into an everyday reality has been challenging and the economic crisis has compounded this.

SEPA is vital if we are to achieve a true single market for payments that will deliver efficiency gains for banks and clients and enhance competition. The proposal for split [migration] dates of the end of 2012 for credit transfers and 2013 for direct debits is broadly acceptable. So SEPA will go ahead, albeit at a slower pace.

Mr Sultan: The key SEPA standardisation building blocks are in place and many clients are rationalising the number of bank accounts and taking advantage of the SEPA pricing offered by scale providers such as ourselves [Citi]. But the full benefits will only be realised when a critical mass of transactions is being exchanged via the SEPA schemes. The political momentum to bring about complete SEPA migration by an end-date is supported by all the EU institutions and a proposal has been made to migrate credit transfers and direct debits over the next 12 to 24 months. The challenge now is to work closely with the regulators to avoid unintended consequences.

As the global economy recovers, concerns remain over financing trade flows. How can this be remedied?

Mr Caviezel: Any uncertainty is largely mitigated by increased government support through credit agencies and specific programmes. Trade flows will continue to be financed as long as the returns are acceptable to financial institutions. The risk/reward balance should exist and one of the crucial benefits of trade assets is their historic performance, as losses from trade financing remains low. Assuming that these balances remain at acceptable levels, trade financing could attract new and alternative sources of funding from investors looking to diversify into new risk exposures.

Ms Fawcett: There were initially concerns that Basel III was going to be negative for trade financing, particularly for small and medium-sized enterprises (SMEs) buying goods from Asia and looking for trade finance in OECD markets. But there has been an enormous amount of work done by banks with regulators and industry, and there have been some very positive movements in the past couple of months. Firstly, there is welcome recognition in Basel III of the cash inflows from trade finance.

One big factor limiting the availability of trade finance is the assumed tenor in capital ratios: Basel rules assume that all trade finance [has a tenor of] a minimum of one year, when in reality it is on average 90 days, meaning that you are immediately required to hold two to four times the capital you really need. But many national regulators are taking the opportunity to waive this rule, such as the US, Germany, Singapore, South Korea and Hong Kong. Just that one change frees up an enormous amount of capacity in the market.

In September at [the] Sibos [banking conference] we were saying that Basel III, implemented as planned, would knock 2% off global trade; now, it is possible that we may end up in a better position than when we even started these discussions.

Mr Verschoyle-King: As growth in one region or sector is offset by continued contraction in others, trade – and, by extension, the financing of trade – will remain challenged throughout 2011-12. A key way for banks to assist the trade-finance process is to work together to share the risk burden. This will require each institution to play to its strength, whether risk management or transaction processing.

Mr Steinmüller: Banks need to work together – and with the regulators – to ensure that corporates receive adequate support for their international trade activities. Of course, collaboration is at the heart of trade finance, but such arrangements really come into their own during periods of elevated uncertainty. Regarding regulation, trade finance's unique risk profile needs to be acknowledged in order to allow providers to continue financing their clients at a time when recovery and growth remain relatively fragile.

Mr Stevenson: There is sufficient current capacity to cater for world trade. The key issue, however, is to ensure that we keep it that way as demand increases and regulation has an impact on supply. We are continuing to work closely with regulators around the world to make sure that sufficient capacity is retained to support this key driver of economic recovery.

Mr Sultan: We believe that the trade finance business will continue to consolidate. Especially with trade flows growing between developing economies, successful trade banks will need to have extensive networks, with on-the-ground capabilities linked to global platforms offering a wide range of trade services and financing.

We see that clients continue to be concerned about the health and viability of their vendor and supplier bases, and are seeking solutions to maintain supply-chain stability. As SME suppliers are impacted by the credit crunch, they continue to face difficulty in obtaining loans. Meanwhile, their corporate buyers, our clients, need to ensure an uninterrupted flow of components and materials from these suppliers.

What are your clients most concerned about in the coming year?

Mr Caviezel: Our clients are concerned about important systemic issues: understanding the impact the changing regulatory environment will have on their business, maintaining access to credit and liquidity, and maintaining the investment spend required to remain relevant to win in their markets. All these issues mean that they want to be closer than ever to their key bank partners.

Ms Fawcett: Their view is similar to ours: this is an uncertain year, so they are being cautious. There is also growing concern among companies in Asia that, with exchange-rate movements, some parts of Asia are becoming relatively expensive. We [in Asia] still have a taxation advantage over OECD nations, but the actual cost of doing business is getting higher. This year is all about gearing up for growth where possible, but keeping some stores in the cupboard for the uncertainties.

Mr Verschoyle-King: The top three concerns [for clients] are: the perceived continuing instability of the financial markets, the seemingly endless burden of regulation and effective cost-management (which stems from both compliance-related expenses and the absence of the natural revenue growth that we would normally see in the economy). From a service-provider perspective, such concerns are reflected in the substantial growth in outsourcing that was mentioned earlier.

Mr Steinmüller: The events of the past few years resulted in a heightened awareness of counterparty risk and the dangers posed by a sudden drying-up of short-term credit markets. These issues are still very much at the top of the agenda. Given the current climate, there are also some concerns regarding regulation – our hope is that this does not unnecessarily impact the crucial provision of transaction banking services.

Mr Stevenson: [Our clients are concerned about] mitigating risk effectively in all forms – from the raft of regulatory changes to counterparty risk – and ensuring that they have access to expert knowledge to help make informed business choices. Delivering holistic risk management, leading-edge products and advisory-led services for our clients are all key parts of our proposition.

Mr Sultan: For our clients and us, the single biggest issue for our industry is uncertainty. This is also a problem as it relates to regulatory change and the impact on banks, financial institutions and their clients. We aim to stay close to our clients and help them progress regardless of the environment.

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