Faced with a mass of regulatory reform and the ill-effects of the sovereign debt crisis, transaction banking is set for more change. And despite the emergence of new competitors, the competitive landscape is contracting thanks to global consolidation. The Banker speaks to some of the world's leading transaction bankers about their strategies for the coming year and beyond.

Transaction banking braced for a year of further consolidation

Scott Barton, co-CEO of international banking, RBS

Richard Dallas, transaction banking director, Lloyds Bank

Karen Fawcett, group head of transaction banking, Standard Chartered

Christopher Foskett, managing director and global head of sales, JPMorgan Treasury Services

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

Pierre Veyres, head of global transaction banking, BNP Paribas

What impact has the crisis in the eurozone had on your operations?

Karen Fawcett: Transaction banking capacity in Asia has been expanded by various competitors entering the market over the past three years. The picture is now changing as a result of the eurozone situation. Many European banks are pulling back from areas such as commodity trade finance and this presents a great opportunity for us and some of the relatively stronger US banks.

Richard Dallas: The treasurers with which we deal have become much more conservative in their engagement with Europe. This had led them to manage trade-offs, for example, as any local positions are repatriated to manage exposures, cash balances at the centre increase. This means deciding with which institutions and what product set to place the surplus cash. Even with a select placement panel this might mean having exposure to banks that are from or have exposure themselves to Europe. Country, counterparty and settlement risks are gaining more focus from treasurers and banks alike.

Christopher Foskett: We are seeing increased counterparty and liquidity risk across the board. Because of this risk, we continue to assess the best options for us and our clients, supporting the economic activity within the region, and between Europe and the rest of the world. We regularly test our contingency plans, the level of our own preparedness, and that of our providers, as well as market infrastructures, based on multiple types of scenarios. Our focus is on business resilience, so that we are prepared for any market, political or natural event that may occur and minimise any impact on our clients. 

Paul Simpson: Given the uncertainty and fluidity in the eurozone markets, clients and financial institutions have had to do some major business continuity and scenario planning. You need to step back and ensure you have contingency plans to pay workers, suppliers and not disrupt the supply chain. If a country exits the eurozone, it will be essential that you have connectivity to the central bank, and that you have done all the legal due diligence for context and jurisdiction.

Diane Reyes: With specific regard to cash management, customers are currently closely focused on their working capital cycle, the efficient use of cash and the conservation of capital. We provide the kind of end-to-end cash management solutions to help them manage their resources more efficiently. Further, we are an excellent counterparty for clients to consider when reviewing their transactional flows.

Scott Barton: We are closely monitoring the situation in the eurozone and have proactively managed our exposures to eurozone sovereigns, banks and corporates since concerns about the strength of the sector began to emerge in 2010. We have contingency planning in place and have carried out stress-test analysis for various scenarios, including some countries leaving the eurozone. Obviously the redenomination of any country in the eurozone would clearly have significant implications for our clients with operations in that country.

Given the uncertainty and fluidity in the eurozone markets, clients and financial institutions have had to do some major business continuity and scenario planning

Paul Simpson

Naveed Sultan: As a global institution, part of our contingency planning is to ensure that our systems and teams around the world are prepared to support clients through any market event and the crisis in the eurozone is no exception. Our systems already handle multi-currency payments and as such we are well prepared to support a new currency, should it be necessary. Obviously there are a lot of questions being asked by our clients across all segments in terms of preparedness for any market event and steps they should be considering. 

What are your biggest regulatory concerns?

Mr Sultan: Banks and our clients have faced a significant number of regulatory changes in recent years, including the Single Euro Payment Area (SEPA) and the Payment Services Directive, Target2, the European Market Infrastructure Regulation and MiFID II, the Dodd-Frank Act in the US and the global Basel III initiative just to name a few. We are proactively engaged in these regulations and are responding actively.

Mr Barton: The raft of global and regional regulation currently facing the industry is unprecedented. We are excited by the SEPA end date of February 2014, which will bring benefits for both banks and their clients. A joint end date for credit transfers and direct debits is something that RBS has long advocated.

Mr Dallas: The challenge the industry faces at the moment is the sheer number of initiatives to which we have to respond in the near future. All these changes are designed to ensure banks operate in a better way than previously. Not only do we have complex interdependencies to manage across the organisation to ensure the effective implementation of change, there is also a concern that the cumulative impact may, from a transaction banking viewpoint, constrain the benefit that was originally intended.

Mr Veyres: The upcoming regulatory environment was meant, among other things, to favour stable and less risky activities. It seems there is still some way to go, particularly in the trade finance arena in spite of some improvements presently in discussion. In particular the capital allocated to performance guarantees and letters of credit seems still high when compared with the acknowledged track record of the industry.

Mr Foskett: Our main concerns are around the impact of Basel III on trade and wholesale funding. While we recognise regulatory reform was needed and are supportive of tougher capital standards, we are concerned by some aspects that may have unintended consequences. The one-size-fits-all approach to calculating the leverage ratio does not consider the true level of risk associated with trade financing, which may hurt global trade. Basel III rules also may reduce credit availability and increase the cost of funding for banks. We are working with the regulators directly and through the relevant industry organisations to discuss our concerns and provide the evidence, based on historical industry data, to avoid a negative direct or indirect impact on economic activity.

Ms Fawcett: Basel III is obviously a cause for concern if implemented in its current state, given that it compounds the current situation under Basel II where trade capital and liquidity requirements are up to 3.5 times those required for the true risk. There have only been minor positive improvements so far – for example, just the waiver of the one-year maturity floor on trade letters of credit – leaving the many unintended consequences of Basel III on trade finance completely unchanged. This is despite the industry producing very convincing credible data, for example, the ICC-ADB (Asian Development Bank) trade registry commenced in 2010 has confirmed the low-risk nature of trade finance, with default rates ranging from 0.01% to 0.29%, depending on the trade product, over the past five years. 

Realigning trade capital to its true risk requires tenor matching for all trade products (including receivables finance), developing a trade-specific behaviour curve instead of using the generic corporate curves, and allowing for loss given default to be zero for fully collaterised products. While the new liquidity requirements under Basel III need to recognise the true liquidity experience of trade, which includes high-inflow factors from both corporate and bank trade and low conversion from off to on the bank balance sheet.

Mr Simpson: The draft Basel III regulation as currently written will be detrimental to banks, clients and world trade, given the risk-weighted and capital approach for trade. If the regulation is passed as is, there will be a substantive impact on developing countries’ abilities to export and import on a cost-effective basis, which will lead to greater financial and humanitarian hardship. Additionally, the opaqueness of the regulation regarding liquidity classifications will lead to different interpretations, different business models that will differ from client segment to client segment. The regulation could also make operating conditions more difficult, especially for small to medium-sized banks.

Mr Steinmüller: Our major concerns are less related to upcoming changes to regulations such as Basel III but are more focused on the lack of global harmonisation around these measures, which could facilitate regulatory arbitrage and a distortion of competition.

Which geographical regions do you think present the most opportunities?

Mr Steinmüller: Emerging markets, and in particular Asia, will remain the growth engine of the world in the coming years. About 30% of the growth in our transaction banking business is attributable to Asia, but we see opportunities across the globe, especially with increasing global regulation and market consolidation.

Emerging markets, and in particular Asia, will remain the growth engine of the world in the coming years

Werner Steinmüller

Mr Simpson: Latin America offers massive opportunities across Brazil, Mexico and Chile, as well as in Peru, Colombia and Central America. Infrastructure projects against oil, gas, the Olympics, sporting events, roads and power will create opportunities throughout the region, particularly for financial institutions that are awash with US dollar liquidity. Trade flows between Asia and Latin America have increased significantly and institutions that can provide capabilities on both sides will be big beneficiaries. Notwithstanding some recent macroeconomic and country volatility, Asia still provides great opportunities based on demographics, commercial flows and capital flows. It is a natural trading partner with all regions.

Mr Barton: The biggest growth area we’re seeing is still in Asia. Gross domestic product (GDP) in these markets, particularly in China and India, is forecast to grow at a faster rate than the mature markets for the foreseeable future, which provides substantial opportunity for transaction banks. Significant opportunities exist not only for trading with Europe and the US but there is also robust trade growth between countries within the region.

Mr Veyres: No surprise, Asia-Pacific remains by far the most attractive region for us in spite of a recent slowdown. Europe has also significant potential due to the refocus of some regional players on their domestic markets, which we at BNP Paribas see as an opportunity across the region. North America remains important thanks to the depth of the market.

Mr Foskett: Our main areas for growth continue to be in the emerging markets as the consumption from the middle class increases, not just the traditional BRIC [Brazil, Russia, India and China] countries, but a broader range of countries across Asia and Latin America, and also Africa. The International Monetary Fund forecasts trade volume growth for 2011-12 to be stronger in developing and emerging markets than in developed economies. We are seeing new trade and investment flows, with increased flows from south to south, and increased investment opportunities as regulatory restrictions in the emerging markets are gradually lifted. 

Mr Dallas: The best opportunity for us is in serving our core UK customers brilliantly. Our goal is to make them more successful. Our customers are finding every niche and opportunity that they can to survive and grow through these difficult times. They are well aware of the well-known opportunities in the BRIC and other global growth markets. Our role is to support them as they seek a move into new markets. This does not mean we need 'BRICs and mortar' on the ground in these markets to serve them, far from it, information flows at lightning speed these days. More, it is up to us to provide the expertise on the financial control, risk and protection aspects of their ventures. Treasurers are looking to us to advise them on the new currencies in which they are dealing, to set up trade finance agreements to support the physical supply chain and to provide effective reporting, repatriation, sweeping and pooling services to support regional and global treasury operations.

Ms Reyes: Our recently launched trade forecast, HSBC Trade Connections, is expecting that world trade volumes will grow by 73% to 2025 and we are urging companies to seek out the right opportunities that will enable them to capitalise on this growth. In addition, the forecast predicts that Egypt, India, Vietnam, Indonesia, China and Brazil will be the international powerhouses that drive world trade growth until 2025. 

What are your priorities with technology? 

Mr Barton: We’re always looking for ways to make life simpler and more efficient for our clients – whether that’s through enhancing the performance of our existing platforms or developing new solutions that better address our clients’ needs. Clients are increasingly looking for the delivery of multiple products through a single portal, and we are investing heavily in the development of channels to make access easier.

Mr Foskett: As we grow our business around the globe, our focus is to leverage new technology developments to enhance our clients’ experience and ease of doing business. We will continually invest in global platforms to provide our clients with global reach and consistency across locations, global visibility and control of their intraday and balance-sheet liquidity, as well as scale and resilience.

Mr Dallas: Transaction banking at its most basic is a utility service, moving and collecting settlements safely. Like all utilities such as gas, water or electricity, constant investment is required to maintain the integrity and safety of the service. Like many utilities, we operate in a regulated environment and fulfilling both the regulatory and security aspects of the infrastructure will always take top priority. Increasingly, investment committees also recognise the importance of transaction banking in helping customers do business. Once we get the basics right we really focus on what efficiencies we can bring to our customers.

There is much attention on how much banks are lending to small businesses. In transaction banking we also recognise we can help our customers manage their working capital more efficiently. In assisting our customers to collect cash more efficiently, have more visibility of their positions, invest safely, control their procurement costs, protect their trade positions and so on, our customers have more surplus capital to re-invest in their businesses.

Mr Simpson: Our technology investments are focused on bringing clients valuable transactional information that will significantly improve their decision-making abilities − things such as enriched data and new transparency and analytics. It is imperative that we simplify and streamline regional variability and complexity through a consistent global experience. Innovations such as cloud-based data storage will allow the bank to extend its security infrastructure to clients of all sizes.

Mr Steinmüller: We continue to invest in our processing and distribution platforms to benefit our clients on a global basis and to maintain the premium level of service they expect from us. At Deutsche Bank, our closer integration within the corporate and investment bank division has helped us to strengthen joint platforms and solutions.

Ms Fawcett: At Standard Chartered, the real drivers for technology are about meeting the clients’ needs, helping them to optimise their business processes and bringing value-add to their business through seamless processing, excellent service and the provision of tailored information. We are investing heavily, continuing our build out of leading-edge processing platforms as well as enhancing our electronic channels to ensure seamless integration with financial markets capabilities.

Mr Veyres: Connectivity and a multi-bank approach are our priorities due to the importance of the large corporate segment in our business mix. The liquidity situation in several markets pleads for the multibank dimension in a client-driven way, namely we start from the needs and the constraints of the client rather than from our requirements, hence the recent initiatives launched by BNP Paribas in terms of host to host and supply chain.

Mr Sultan: We have placed a tremendous emphasis on technology and product development through collaboration with our clients. Citi has established its own dedicated process in relation to innovation. As part of this, we have established innovation labs across Europe, the US and Asia that specifically focus on developing new solutions in partnership with our clients and other relevant partners such as technology companies across the globe. In these centres we are looking at emerging technologies, such as mobile, and how they can enhance and enable operations for institutional clients as well as consumers globally. Examples of current initiatives include mobile payments, digital identity management, liquidity management and concentration solutions and working capital analytics. 

Ms Reyes: Future platforms must allow us to construct flexible customer propositions, which meet the needs of different market segments while enabling banks to comply with all new regulations. It is these core platforms that will be the real differentiators in the next few years.

How tough is the competitive landscape, and why?

Ms Fawcett: I believe this is the decade of transaction banking. Over the past three years, there has been increasing recognition that the transaction banking business anchors client relationships while providing a stable source of liquidity. Therefore competition is fierce and expected to get tougher. But in the new world, not all banks will succeed. The world is divided into banks that can access dollar liquidity and banks that cannot. For transaction banking, we are seeing some of the competition consolidating capital and risk back home, while others cannot afford the huge capital investments in infrastructure and network that the business requires. This creates opportunities for banks such as Standard Chartered, which has been operating in the growth regions of the world for more than 150 years.

Mr Simpson: The transaction banking competitive environment gets more attention in tough economic times as banks refocus their efforts on core businesses that are most critical to clients. At Bank of America-Merrill Lynch, we feel we are well positioned based on our intense client focus, global footprint and global product platforms, which deliver visibility and control of client-critical working capital. The competitive landscape continues to be fought and won based on financial institutions’ attention to client-centricity. Banks that focus on industry-specific, client-specific solutions continue to win, while banks that provide commoditised, product-siloed solutions will continue to lose.

Mr Veyres: The new macro-environment has added significant pressure on most transaction banks. It is, however, a bit premature to say who are the winners and the losers, but it seems that some regional banks are less present compared with a year ago. All in there is some repricing in some areas such as Europe and some parts of Asia though, which indicate that overall the supply and demand of business has evolved.

Mr Barton: Since transaction banking broadly grows in line with GDP, the landscape will continue to be challenging as global GDP growth remains muted for the foreseeable future. For example, pricing of deposits continues to be very competitive as banks are keen to attract deposits that provide liquidity for the balance sheet.

Mr Foskett: We are seeing increased competition as additional capital requirements, driven by regulatory reform and globalisation, are driving the need for scale. That said, we are seeing an increasing need for providers to co-operate to expand reach and capabilities while managing investments required, addressing local expertise and speed to market. We are enabling our financial institution clients to leverage our investments in our global network, by offering them with a range of global and local account services for them to expand their franchise in their target markets and generate additional revenues from their corporate and retail clients in fast-growing markets.

Mr Sultan: The competitive landscape is both contracting through consolidation globally and expanding through the emergence of new competitors, which are not all banks. They are in the technology industry, web-driven networks and businesses. We’re seeing increased competition at the global, regional and domestic levels. From our perspective, that’s not necessarily a bad thing as it pushes us to increase our focus on the client and ensure that we are partnering with them to deliver solutions that are meeting their unique needs and delivering greater efficiencies to their operations. Despite the turmoil in the markets, there continue to be opportunities, and we’re seeing banks globally both competing and partnering, resulting in some of our top competitors also being clients and partners. 

Mr Dallas: Banks both co-operate and compete vigorously. We co-operate to ensure customer transactions are executed in a secure, timely and accurate way. All our money-moving activities require effective co-operation, just look at how the industry 'chip and pin' scheme has been successful in reducing fraud and how faster payments have transformed the experience of online payments and certainty of intra-day receipt.

Where we compete is in the customer experience; how we engage with our customers through the various channels they use such as branch, telephony or electronically. Here the competition is as vigorous as the co-operation and there is plenty of space for differentiation. The competitive space is in electronic channels, which are now the principal point of contact with the customer. Not only in online services, but in new channels such as mobile and direct connectivity. The successful banks will be those that not only move into the vanguard of channel development, but which will also more successfully manage the customer experience and presentation of information, whichever channel the customer chooses to use.

Mr Steinmüller: Even in a difficult market environment, transaction banking is a reliable provider of liquidity and steady revenue streams. This has led market participants to further enhance their product range as well as their global presence, but the attractiveness of this market has also put pressure on margins. Given the limited capital resources, increasing demands of capital requirements and continued investment to maintain competitiveness, only scale players are likely to be profitable and market consolidation is expected to continue.

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