The changing face of transaction banking

Participants:

Pascal Augé, head of global transaction banking, Société Générale

Kevin Brown, global head of transactions services, RBS

David Cruikshank, chief executive officer, BNY Mellon treasury services group

Karen Fawcett, group head of transaction banking, Standard Chartered

Tom McCabe, head of global transaction services, DBS Group

Diane Reyes, global head of payments and cash management, HSBC

Paul Simpson, head of global transaction services, Bank of America-Merrill Lynch

Werner Steinmüller, head of global transaction banking, Deutsche Bank 

Naveed Sultan, global head of treasury and trade solutions, Citi Transaction Services

Matt Tuck, global head of financial institutions, Barclays corporate banking

Lewis Warren, managing director and global client executive, JPMorgan 

With discussions still centring on regulation and the downturn in the global economy, anyone would be forgiven for thinking that not much has changed in the past year for transaction banking. But while in 2012 the main concern was the sovereign debt crisis, now worries have shifted to the US and the 'fiscal cliff'.

This time last year, European sovereign ratings were being downgraded and the future of some eurozone economies remained in doubt. Transaction banks were poised to turn the potential crisis into an opportunity by proving to their clients that they were prepared for such a scenario and had the edge over their competitors. Contingency planning was high on the agenda of transaction banks, as they prepared themselves for the most extreme circumstance – a country dropping out of the euro and creating a new currency overnight.

Another less tangible change has been that many banks have changed their transaction banking strategy, placing a renewed importance on the role of transaction banking, and an emphasis on one element in particular: the client.

Shouldering regulation

For all that has changed, however, regulation is still very much at the heart of discussions in the transaction banking space. Coping with regulatory change has been a huge cost burden to banks and the overriding feeling is that the regulatory landscape has not finished changing. Head of global transaction services Bank of America-Merrill Lynch (BAML), Paul Simpson, predicts that in the coming months regulators will revisit the rules “after realising tighter controls have constrained certain areas and negatively impacted national government organisations and developing countries".

Naveed Sultan, global head of treasury and trade solutions at Citi Transaction Services, believes that more regulatory change is still to come and that this is something banks will have to learn to adjust to. “Regulation will continue to evolve and impact the industry,” he says.

Many transaction bankers are now considering how they can turn the realities of the more closely regulated environment to their advantage. As well as making the most of the financial investment, there is also the potential for banks to take on an advisory role explaining to their clients how regulation affects them.

“BNY Mellon sees unrelenting regulatory pressure,” says David Cruikshank, chief executive officer at BNY Mellon treasury services group. “Bankers are accustomed to regulation. Now regulation is joining cash management as a foremost concern for many clients. We are partnering with clients to help them develop better solutions to address their compliance challenges – we have found it to be a great way to add value to client relationships."

Those that can readily adapt to new rules will have a distinct competitive advantage says Diane Reyes, global head of payments and cash management at HSBC. “Successful transaction banks will be those that embrace the new regulatory environment, giving clients comfort that they are dealing with a strong counterparty," she says.

The strength of the counterparty has taken on increasing importance and more emphasis is being put on the financial strength of a financial institution. “BNY Mellon is executing a growth strategy focused on solutions that optimise liquid assets and facilitate global commerce for clients in targeted markets," says Mr Cruikshank. "We are building on our strengths – strong financials and long-standing traditions of impeccable performance, innovation and client support – to provide treasury services that help BNY Mellon’s clients succeed.”

Safety and resilience has been a key theme for JPMorgan. “In 2013, JPMorgan is seeing greater emphasis on safer places for deposits with creative yield-enhancing solutions, cross-border payments to support growing international franchises and utilisation of our best-in-class clearing products across the key global currencies,” says Lewis Warren, managing director and global client executive at JPMorgan.

Race towards SEPA

In Europe, a significant regulatory development is approaching in the form of the end-date for migration to the standards for direct debit and credit transfer in the Single Euro Payments Area (SEPA). “SEPA readiness will be a significant focus for banks and treasurers as the February 2014 deadline approaches,” says Ms Reyes.

The SEPA environment has shifted the competitive landscape of payments in Europe and has opened up opportunities for many players that are now able to build scale as they do business across borders in Europe. Also, regulations have allowed non-bank players to enter the payments space as payment institutions and challenge the banks in the domain that was traditionally theirs.

Pascal Augé, head of global transaction banking at Société Générale, says that the trends in 2013 will be "the growing importance of Asia, Africa and Latin America for trade. And the race towards SEPA implementation may provide some players with a distinctive edge for a few months before the whole sector aligns in 2014."

Ready for the renminbi

Regulatory change is also taking place in China, where the liberalisation of the currency, the renminbi, is taking place. Mr Simpson at BAML says that the surfacing of the renminbi as a reserve currency will be a key trend in 2013 and beyond. And, because the changes are occurring at a relatively fast pace, transaction banks have been keen to demonstrate to their clients that they are the experts in this burgeoning area.

Ms Reyes at HSBC recognises the value of this opportunity. She believes that in 2013 China will become more noticeable in the transaction banking space. “China will open up to become increasingly part of the payments mainstream, creating significant opportunities for clients,” she says.

As for the state of the Chinese economy, BAML's Mr Simpson predicts that, in the coming year inter-regional and intra-regional flows will keep expanding.

China is obviously important in any of the discussions and is key to the state of the global economy. Although there have been concerns of a slowdown, and even a hard landing, China is still growing. HSBC’s chief economist for greater China, Qu Hongbin, projects that China’s growth bottomed out in the final quarter of 2012, and forecasts that China’s gross domestic product (GDP) will recover to 8.6% in 2013.

Global picture

The projections for the global economy are bleaker. The International Monetary Fund (IMF) revised its forecast for 2012 down to 3.3% for 2012, and projects that growth will be 3.6% in 2013. "Low growth and uncertainty in advanced economies are affecting emerging market and developing economies through both trade and financial channels, adding to home-grown weaknesses," says IMF chief economist Olivier Blanchard.

The Organisation for Economic Co-operation and Development (OECD) has a similarly bleak outlook. OECD secretary-general Angel Gurria says that “the world economy is far from being out of the woods”. In November 2012, the OECD projected that, provided the ‘fiscal cliff’ in the US is avoided, global GDP growth for 2013 will be 2% rising to 2.8% in 2014. The OECD expects China's GDP to grow at 8.5% in 2013 and 8.9% in 2014, while GDP is also expected to rise in Brazil, India, Indonesia, Russia and South Africa.

These economic forecasts are reflected in the changing geographic focus of many transaction bankers. As the difficulties in the eurozone look set to continue, focus is turning to other, more promising markets. “The industry will see a continued shift towards the geographies where the growth will come from. Local competition in growth markets is likely to increase,” says Citi's Mr Sultan.

Local competition comes in the form of institutions such as Singapore-based DBS Group, whose CEO Piyush Gupta – a former Citi banker – is carving out a pan-Asian strategy for the bank. And transaction banking has played a key role in the bank’s growth over the past year. The contribution of global transaction services (GTS) to the overall bank’s results has been increasing steadily, as has the bank’s trade finance business in Asia.

With its promise of future growth, Asia is a key region for many transaction banks. “Economically, we expect more uncertainty – growth in Asia, and less growth in Europe," says HSBC's Ms Reyes.

Moving up the ranks

Geographic focus is not the only change emerging in transaction banking. Société Générale has, in recent months, made an effort to position itself as a transaction bank, placing an emphasis on global transaction banking (GTB). And the fact that its head of transaction banking, Mr Augé, sits on the general management committee indicates the importance that the bank places on the role of transaction banking. “GTB has become and remains a core activity for the whole group,” says Mr Augé.

Such restructuring has been a trend in recent years. Rather than being limited to infrastructure or something that goes on in the background, transaction banking has moved from having a supporting role in the bank to being a division that is able to provide steady and consistent returns. Now, many banks are thinking about how they can make transaction banking a major part of their business.

In recent months, a number of banks have restructured to bring transaction banking to the fore. In 2012, Deutsche Bank announced its Strategy 2015+, which laid out the bank’s ambition to be the leading client-centric global universal bank. GTB became one of the four pillars of the bank, alongside private and business clients, corporate banking and securities, and asset and wealth management.

At the time of the announcement, the bank stated that the “closer collaboration between the individual business divisions and the infrastructure functions should generate substantial synergies”. It set a target for the growth of the GTB business, and aims to double income before taxes from €1bn in 2011 to approximately €2.4bn by 2015.

Werner Steinmüller, head of global transaction banking at Deutsche Bank, is confident about the changes that the bank is making. "At its investor days, Deutsche Bank has clearly stated the importance of its successful transaction banking franchise as one of its four business pillars, and its appetite in doubling its bottom line by 2015," he says. "We articulated a clear strategy and are ready to invest the required resources in terms of capital, and budget for further platform investments and additional talents to achieve this ambitious, yet achievable, target.”

One-stop shop

Deutsche Bank is not the only bank to restructure its business. At the start of 2012, RBS made an announcement about where transaction banking would sit within the overall structure of the bank. The changes reorganised the bank's wholesale business into ‘markets’ and ‘international banking’. At the time, Stephen Hester, RBS group chief executive, said: “Our goal from these changes is to be more focused for customers, more conservatively funded, more efficient and with better, more stable returns for shareholders overall."

The international businesses of the GTS arm were combined with the global banking and markets corporate banking business into the new international banking unit. By merging transaction services into this unit, the bank aimed to provide its clients with ‘one-stop shop’ access to debt financing, risk management and payments services. The bank also explained at the time of the announcement that the international corporate business would be self-funded through its stable corporate deposit base.

One of the consequences of the change was that RBS’s business of ‘global transaction services’ dropped the ‘global’ and became RBS transaction services. Interestingly, Citi’s transaction business now calls itself Citi Transaction Services, rather than Citi Global Transaction Services. Just because these banks have dropped the ‘global’ from their transaction banking units does not mean they are not a global business, however.

Jostling for position

One of the benefits of restructuring to place transaction banking within the bank is that clients deal with one contact in the institution, rather than being contacted from the various divisions. Previously banks worked very much in silos and there was not much communication between the transaction banking division and other departments. These days, transaction banks aim to organise themselves so that they can provide solutions that cut across separate divisions of the bank, the idea being that there is a focus on client service rather than particular products.

Many banks have focused upon working across the various divisions to bring the synergies from the departments. In the case of JPMorgan, for example, in 2012 it restructured and aligned its treasury and securities services and the investment bank to create the corporate and investment bank. 

Part of the reason that banks are restructuring is because transaction banking is a low-margin business and banks need to be organised effectively to be able to make the most of their investments. But over the past few years, banks have also recognised the increasing importance of transaction banking and the fact that the industry is becoming more competitive.

“Competition in transaction banking is becoming more fierce as banks recognise the value it brings," says Karen Fawcett, group head of transaction banking at Standard Chartered. "But with high entry barriers, success requires scale, competence and presence at both ends of key trade corridors. The key corridors are both East to West and within the increasingly important growth areas of Asia, the Middle East and Africa. This network, combined with leading-edge product innovation and an integrated and efficient electronic distribution, is in the grasp of very few banks, [but one of them is] Standard Chartered.”

Mr Augé is anticipating “tougher competition while the banking industry recovers from the crisis, both in terms of pricing and of technology”.

The emphasis in this new, more competitive environment is on improving services and increasing capability, says Mr Steinmüller. “In a continuously challenging market environment I see opportunities to grow across the globe for well positioned transaction banks. With increasing regulatory requirements and decreasing margins, client-focused scale players that actively invest in their platform’s efficiency and innovativeness will take advantage of further market consolidation.”

To remain competitive in the transaction banking space, time, resources and investment will be vital, says JPMorgan's Mr Warren. “Increased costs, complexities and a dynamic regulatory environment are driving major changes within transaction banking," he says. "New and innovative solutions must be created to address these factors, requiring significant investment from global banks. JPMorgan sees itself as extremely well positioned in this manner to support its clients in the new environment.”

Client relations

The relationship between bank and client is at the core of most new transaction banking strategies. Changes at Deutsche Bank and RBS were explained in terms of putting the client at the centre, and other banks are putting renewed focus on how to best serve their clients. But, with every bank claiming to put the client at the centre of what they do, it is hard to differentiate between them.

At JPMorgan, the customer-orientated approach is straightforward. “JPMorgan strives to provide clients with the best service, solutions and advice," says Mr Warren.

For some banks, the new emphasis on the client is about achieving stable returns, even in the most difficult economic conditions. Standard Chartered's Ms Fawcett stresses the importance of remaining competitive and maintaining strong footholds in the markets in which the bank operates. “Our objective continues to be on achieving core bank status with our clients," she says. "To do that we continue to invest, innovate and deliver market-leading solutions despite a turbulent period that saw some of our competition consolidate and retreat from their non-focus markets."

Citi's Mr Sultan views the tough economic climate, increasingly cautious investors and increasing regulatory pressure as a test. “Citi continues to build resilience in its operating model and focus on delivering commercially relevant solutions to support its clients’ complex needs," he says. “There is tremendous opportunity for those banks that are focused on client needs, risk management, adapting to a changing regulatory environment and demonstrating continuous commitment to making transaction banking strategically relevant.”

Adaptable approaches

Remaining relevant and adaptable is a key concern for Société Générale's Mr Augé. “Société Générale's objective is to develop products that meet our clients’ changing needs, demonstrating how our global solutions provide solutions both in terms of efficient and inexpensive cash-flow processes, and geographical focus on central and eastern Europe and Mediterranean areas," he says.

For HSBC, focusing on the client is about treating clients on an individual basis and tailoring investment solutions to their unique needs. “Simply, our focus remains on staying close to our clients: making sure every solution we take to our clients is suitable for them – helping them manage liquidity effectively,” says Ms Reyes. “We are focused on helping clients achieve their growth goals by meeting their cash management needs – particularly international growth – connecting developed markets in the West with emerging markets in Asia.” She adds that helping clients understand the renminbi and the implications of China opening up is also a key objective.

Another bank that is looking to provide specialist expertise in the Asian market is Singapore's DBS. “There is a high level of interest for excess cash from clients in the more complex trade structures and regional liquidity management solutions," says Tom McCabe head of global transaction services at DBS Group. "Customers with complex supply and distribution chains are constantly evaluating their risk profile and moving towards more highly rated banks such as DBS to help execute their strategies across Asia.

“Customers are asking: how do I squeeze the most cash flow from my operations, and am I taking the appropriate risks – supplier risk, inventory/distributor risk, foreign exchange [FX] and interest rate risk, etc. From a bank’s point of view, the key question is how to drive more productivity into operations and leverage technology without huge systems investment. There will be a greater focus on materiality and capital efficiency as banks continue to reposition their business models to meet the challenges in the new competitive and regulatory environment.”

Emerging trends

Transaction banks' focus on the client also extends to payments. The World Payments Report 2012 – produced by RBS, management consultancy Capgemini and research firm Efma – commented on how banks are aiming to take customer-centricity to a new level. “After years of sustained success in driving internal improvements for better efficiency and cost-effectiveness in existing operations, today’s horizon of payments innovation is drawing banks further into customer-driven, value-added innovation – an area in which non-bank players have been most successful at capturing the imagination of users to date," says the report.

It is not just the relationship between bank and customer that is changing, says Matt Tuck, global head of financial institutions at Barclays corporate banking. “Looking ahead, there will be a crystallisation of regulatory change that presents both challenges and opportunities," he says. "[There will be] continued innovation, particularly in the payments space, which will further promote partnership arrangements between financial institutions. FIs will need to focus on their core strengths in transaction banking products, and work with others to deliver services to their customers globally.”

One prediction that BAML's Mr Simpson makes for 2013 is that mobile will become a major conduit into business-to-business commerce. It is a prediction that is backed up by the World Payments Report 2012. “Looking ahead, industry analysts expect both mobile and e-payment segments to grow broadly, as customers increasingly embrace these alternative means and innovative solutions continue to proliferate. Industry estimates suggest the proportion of transactions handled outside bank payments systems, while small in absolute terms, is expected to grow very rapidly," says the report.

Optimism reigns

There are a host of changes and challenges facing the transaction banking sector, yet most banks are ready to embrace these changes and are optimistic about the future of the sector. “As illustrated by the findings reported in the World Payments Report 2012, there is good cause to be optimistic about the future of transaction banking, despite challenging market conditions," says RBS's global head of transaction services, Kevin Brown. "This year will see the implementation of a number of regulatory and market changes as a trigger for further innovation – SEPA being a case in point.

“As a transaction bank, RBS is there to support its clients optimise their liquidity, facilitate their trading requirements and provide solutions to mitigate risk. At the same time, we are constantly seeking opportunities to deliver value-added innovation, in response to the changing market and evolving client needs.”

For all the talk of change, the overriding feeling is that the core objectives of transaction banking remain unchanged. At Barclays, the transaction banking strategy still revolves around remaining competitive and offering clients an inclusive package of services. “Our objectives have not changed," says Mr Tuck. "We remain consistent in looking to build true partnerships with financial institution customers through thought leadership and the collaborative provision of services in cash, trade, FX and liquidity globally.” 

The mantra at BAML is similarly concise. “BAML matches its clients’ industry and regional needs, as they expand into new markets, by continuously innovating to provide holistic solutions spanning FX, payments, liquidity and receipts," says Mr Simpson. "Our consultative approach focuses on maximising returns, minimising risk and creating efficiencies for clients, while also equipping them to proactively plan and prioritise accordingly.”