Banks are tackling the payments market in a new way, driven by smaller margins and increasing volume. Dan Barnes looks at the techniques that they are using to achieve their goals.
Increasingly higher volumes and dropping margins in the payments arena – driven hard by the demands of well managed and monitored corporate clients – are causing banks to address their future potential in the market. For some, the mathematics will not work out favourably.
Potential solutions that are available to banks that wish to stay in the cash business include investment in technologies – to cut costs or offer higher returns through improved service – and partnering with industry competitors to combine their strengths and skills.
A recent change in attitude towards such unions looks likely to increase their popularity in the future.
To get a good understanding of whether or not to stay in the cash management arena, a bank must understand the causes behind the current situation. Nick Viner, senior vice-president and director, global payments topic leader at Boston Consulting Group, explains the challenge that customer pressure presents for banks: “This is a time when corporate treasurers really are in a much stronger position than ever before. Why is that? Well, there are a lot more products, there is a lot more software, which is giving them pieces [of information] that would have been front end of cash management systems.
“Overcapacity and customer pressure on margins leads to the question: If I’m a bank in this business and I need to satisfy my shareholders as well, how do I grow?”
Andrew England, global head of product management, global cash management at Deutsche Bank, notes that there has been an impact on the market in recent years. “I think there are fewer banks committed to the cash business than there were a number of years ago. It is a business that has margin pressure on it. But those that have scale and look at it from a strategic perspective, in terms of staying in it for a number of years, do it because they believe they can and are making money.
“At the end of the day, all banks have to make decisions about the sort of clients they want to work with, the sort of services they want to provide directly and those they do not. That is a constant cycle.”
Customer power grows
Lori Hricik, executive vice-president and head of treasury services unit at JPMorgan Chase, says that clients’ stronger grip on their position is not entirely negative for the banks. “The industry is intensely focused on cost reduction and efficiency – not just at banks, but in our clients’ own treasuries and operations. The role of the treasurer is changing. With clients, we’re seeing consolidation of banking relationships and account structures, which creates opportunities, but also risk, because we have to continue to prove, re-prove and deliver value to our clients.
“Clients are focusing on how they can improve their liquidity and cashflow management. This has created opportunities for us to look at our business with a fresh approach and to redefine our cash management business to meet our own and our clients’ higher expectations.”
Ms Hricik not only has to create growth but must communicate this to employees who can see the industry sector suffering. “I want the 12,000 people working in our treasury services business to know that we are a revenue growth business in an industry that’s not growing.
“For the past three years, the JPMorgan Chase treasury services business has shown top-line growth. In an environment where interest rates were declining – and clearly there should have been a negative impact – JPMorgan has shown consistent growth. In 2004, as a merged company, in our treasury services business, we will show top-line growth as well. I don’t think many of our competitors are showing that.”
Investment in technology
It makes sense for banks to look at advances made by corporate clients and emulate them. Stephen Skrobala, director EMEA financial services at Oracle, notes that banks’ clients are in a strong position through investment in technologies that improve management – banks regard such investment as a possible route forward as well.
“Because corporates have more of an enterprise view than sometimes even the bank does, that has enabled them to brutally negotiate on pricing,” says Mr Skrobala. “I know from my background in banking that there were deals that we lost on fractions of a cent in payments. You try to price it at worst to break even because there are a lot of add on benefits you can get from it – so much that you can make it a loss leader.”
Mr Skrobala says that, in his experience, banks are looking at technologies that facilitate storage of structured and unstructured data associated with payments in order to reduce the overall operating costs, but also “enterprise level analytical applications that will help them better manage the payments business more profitably”.
The investment may, however, be about optimisation rather than replacement. “We see a couple of the Tier 1 financial institutions looking to dramatically improve their technology in terms of its robustness and scalability and also its flexibility – there’s quite a lot of legacy technology in that space,” says Mike Thrower, director of marketing at Wall Street Systems. “The Tier 1s are always looking to compete for pieces of the wallet of the important corporate client base. If they don’t invest in the technology, they can not develop their service.”
Top-line growth through value-added services, giving flexible service according to a customer’s needs, is what Renzo Vanetti, CEO of SIA, believes will be a differentiator, and it requires investment in the network infrastructure. He gives examples of these. “The first one is when a customer says: ‘I want this payment operation done in real time and I want to go out from the branch of the bank with the receipt in my hand knowing that the account of my final beneficiary has been credited.’ This is a situation in which banks should use either the network infrastructure or an application – which must be a real time application. The cost of the transaction will be very high so the customer must be able to accept a high price. A second set of customers will ask that the operation completes during that day, so the bank should be able to optimise their infrastructure for use at a time when it is not busy.”
Consolidation cuts costs
Joe Mazzetti, executive vice-president of corporate development at Fundtech has found that banks emphasise cost reduction as a significant driver. “For example, in Bank Austria HVB, we’ll be running a single centre to support multiple countries in central and eastern Europe. Citibank is running globally from one location in the US. They are currently supporting their London operations, going live with Frankfurt and testing north America. That will all be run out of one location so consolidation is the key to cost reduction.”
This option is not always an easy choice for banks. For Mr England, justifying the purchase of these technologies can be difficult, given the competition from other business areas. “As with any investment, it has to have a justifiable business case and that is often locked up in what could be described as a business case but is often a commitment either to the business or to certain clients. So it’s more difficult now to justify investment on a pure isolated business case.
“I think in the past it was probably easier but now, just given the number of potential investment requests, I think that’s a concern for every bank.”
Mr England acknowledges that technology is essential for staying in the game. “If you want to be a serious player in this business, you have to be very strong in terms of technology deployment. It’s not just about straight-through processing (STP), it’s about having a very slim and simple IT architecture. If you have complexity in your back end environment, even with STP, you will still have cost. So technology is very important,” he says.
But he also says that it is a mistake to regard technology alone as a winning strategy. “By itself it’s not sufficient,” he says.
Partnering to share technology
Deutsche Bank is involved in providing its infrastructure as a service to other organisations, such as Barclays, and has a partnership with Postbank in this area of business. Mr Vanetti says that there are clear strengths in partnering or joint ownership models.
“For banks, handling this kind of infrastructure commonly allows the price of the transaction to lower and it will continue to lower depending on the volume. The real advantage to the banks in this case of interbanking or with cross-border transactions is that they are able to have these transactions computed in a unique clearing house so that they can get advantages from shared clearing technology,” he says.
The larger banks can invest in technology as one solution to improve their volumes but that does not necessarily lead to a larger footprint – without which their growth could be limited. Partnering is another option available to them. Through partnerships, their smaller counterparts’ local knowledge can be leveraged to gain market share on the understanding that their partners then have access to the bigger organisation’s services and technology.
Mr Viner support this idea. “A lot of these smaller banks are going to be struggling to meet these investments, so here is a great opportunity to marry together the pieces and start to provide [partnered] services.”
Attitude adjustment
This need for partnerships has driven a change in attitudes. Mr Viner says that he has noticed increased confidence in partnering. “I think we will see a big player and a small player get together and [the smaller] one says: ‘I’m going to help you get into eastern Europe.’ There’s a mindset shift – they will have much more robustness; there will be much more comfort on both sides about the parameters of the deal, so the big player will not be seen to be seeking to take over all of the customer relationships of the smaller player. It wouldn’t work otherwise,” he says.
“I think there’s been a lot of suspicion over the years with [people thinking]: ‘I’m a small bank and if I get this big [bank] in to do this [function] then this is a wedge that they could drive in to take over my customers’,” says Mr Viner. “If anyone believes that, nothing will happen and nothing will move.”
The change in attitude is marked, says Mr Viner. “The larger players have realised that they have to divide up things in a relationship – whether it be a piece of the value chain or ways in which you serve the customer such that you share revenue and profits in an appropriate way, but you don’t make the smaller player feel vulnerable. As soon as you are seen to be doing that you will never sign another deal with anybody. So there’s a bit more sophistication.”
Ms Hricik says that the maturity to work with competitors is a key skill in her job. “Banks are our customers, banks are our partners and banks are our competitors. Together, we have to continue to define how we can add value to the relationships we have with the banks that we work with around the world.
“I continue to be challenged by the proposition of creating value for my banking and non-banking clients in areas where we don’t directly compete. As these clients succeed locally, we all succeed globally.”
