Research Note

Focus on integrated solutions and regional capabilities

By Mobasher Kazmi

Increased use of electronic cash management facilities to enhance cost and operational efficiency is the dominant theme in the transaction banking industry in the Middle East and Africa

The transaction banking business in the Middle East and Africa (MEA) region is being transformed by an increased focus by financial institutions to leverage the growing trade flows between West and East. They are looking to provide more value added services to their corporate and institutional clients as global banks de-risk their exposure to this market. A number of leading Gulf banks are taking advantage of this opportunity to provide more holistic services.

A key driver of growth has been the trade with China, which remains one of the main engines of growth in the global economy and is fuelling development in many of the world’s trade corridors. “Over the past 10 years, we have witnessed material shift in trade corridors with GCC countries increasingly relying on Asian partners as compared to West. For example, China has emerged as the largest trading partner for KSA (overtaking USA). Not only China, other Asian countries such as India, Korea, Japan, etc, have also made it to the list of top 10 trading partners for KSA. This together with growing intra-regional trade are making Gulf banks focus on enhancing their capabilities to capture the growing level of trade flows between GCC and the East,” commented Arup Roy, head of global transaction banking at the Saudi British Bank (SABB).

And there is an obvious role for banks in the region to play financial intermediary between transacting parties from the two the regions.

“Tremendous growth is taking place in the West to East trade and FIs are the natural catalyst to connect that flow,” says Mark Yassin, senior managing director—head of global banking at the National Bank of Abu Dhabi (NBAD).

And there has been a wave of activities as banks compete to build up their cash management and client advisory capabilities to serve multinational corporations and financial institutions looking to tap into growth opportunities in MEA.

“Clients are increasingly looking for a holistic solution covering their entire financial supply chain as part of their ongoing endeavour to optimise working capital efficiency, balance sheet and risk management. In this regard, cash management capability of a bank plays an important role and remains a critical deciding factor for corporates in choosing the right bank,” Roy explained.

Due to the challenges of the current slump in commodity prices and increasingly volatile financial markets, banks are more willing to find partners to complement their offering to clients.

“Given the current business environment, banks are increasingly focussing to partner with other FIs (including ECAs, Insurance Companies) to structure solutions to meet the requirement of their clients and help them grow their business. We also see risk distribution gaining momentum amidst prevailing credit environment,” he continued.

Creating integrated regional platforms
The latest Asian Banker Research annual survey of transaction banking institutions in the region found that banks are increasingly focused on regionalisation as such cross-border transaction flows and linkages deepen. There is an evolution towards the development of regional transaction banking platforms with connectivity across multiple countries of operation. There is also a trend for introduction of cross-border products.

There is a priority to adopt integrated platforms for both cash management and trade finance with a single view access for clients through a single sign-in for users seeking to access cash management and trade finance solutions respectively.

While physical cash and cheque scanning still remains an ongoing operation for some banks, mobile cash management solutions options are also emerging. On-site cheque scanning capability for corporates is there – but the collection of physical cheques still required at later stage due to regulations. Similarly, direct debit, which is now available in the UAE, E-collection, smart cash deposit machines are all different avenues that are enabling the electronic transaction of cash.

Middle and back office operations are also being streamlined with straight-through-processing (STP). MEA based banks are still looking to make that transition which enable IT infrastructure solutions that can allow for a more personalised customer experience.

Banks are shifting towards customer segmentation away from industry size to one that is more targeted to specific industries such as aviation, energy, retail, transportation with dedicated relationship managers servicing clients. This industry segmentation enables superior focus on servicing the large corporates and multinationals.

External factors such as the degree of regulatory reporting and compliance have also made an impact on cash management banks. As the regulatory environment increases in complexity, there is an increased demand for banks who service clients in more than one jurisdiction. These results in a heightened demand for solutions that can help them do business in a more cost-effective manner while still maintaining proper risk management. Additionally, the US liquidity tightening also saw banks expecting interest rates to increase in the long-term. As the net interest income becomes affected, banks will focus on obtaining customers’ operating activities and providing alternatives to enhance customers’ yield on surplus balances in order to attract more liquidity.

MEA banks are facing similar regulatory and compliance challenges that are being faced by their APAC counterparts. There is also a need for more flexibility from ME based regulators in terms of their treatment of transaction banking activities. MEA banks are also hard-pressed to offer greater cross border solutions to complete with international players and perhaps capture market share. This can only be done by offering innovative and tailored solutions to clients given the present dearth in unique and customised solution sets being offered by banks in the region. In order to have competitive pricing and enhanced profit margins banks are struggling to ensure that cost management and optimisation of back-end processes is realised. The pace of bank digitisation remains slower than that in the APAC region. As mentioned earlier there is still an emphasis on physical cash and cheques in the Middle East region.

Clearly, at the core of best practices in cash management today is the ability to deliver on a customised solutions set that meet the unique needs of its clients. However, to enable that service quality and integrated cash management services new products are increasingly being made available through mobile and web-based channels. This has also resulted in increased revenue from transaction banking across Asia, partly driven by higher penetration rates for mobile, internet and smart phone usage across the region. Banks are increasingly coming up with strategies and solutions designed holistically to migrate customers from high-cost payment channels to low-cost payment channels, to drive operational and cost efficiency. This is largely facilitated by increasing the amount of digital options customers have for making payments, and increasing accessibility to these channels; indirectly providing that enabling environment for superior customer service and a more personalised customer experience.

Another key theme is the increasingly comprehensiveness and sophistication of supply chain financing solutions offered by banks for clients’ suppliers and distributors due to the growing demand for receivable and payable finance structures as corporates move increasingly to open account for trade transactions.

Growing trend of “de-risking”
A greater focus on regulatory compliance and risk management has also precipitated increase “de-risking” by banks in the MEA region. As global regulators mandate the strong move towards complete enforcement and transparency, know your customer (KYC) and anti-money laundering (AML) requirements have led to the growing awareness for risk management in transaction banking.

This is also followed up with an enhancement of various online capabilities that enable trade finance solutions and online liquidity management. For clients this results in lower risk and execution of their cross-border transactions, while banks realise operational efficiencies and outreach through their digital channels.

The growth and development of Islamic trade finance solutions as Sharia-compliant products become standardised and increase in their acceptability has also contributed to the increasing use of such instruments by market participants.

For the MEA region, the volatility in energy markets and the increased cost of compliance remains a pressing concern. Contraction in economic growth caused by a drawdown in government spending due to oil income dependent budgets, reduced business investment precipitated a slowdown. The regulatory requirements across the banking world designed to cut down riskier banking practices and avoid another global financial crisis, are constantly changing. However, it is useful to note that the repercussions of the constantly evolving and increasingly stringent regulatory requirements may be further complicated by the different localised regulatory requirements in the countries. Perhaps, greater harmonisation of regulations in MEA region can be made possible. The fact is that physical documentation is still required in many countries across a range of industries.

The payment services business experienced an accelerated growth in 2014 and the momentum of growth is expected to continue. Increasing digital channels usage alongside the move towards mobile banking and mobile-based payment solutions, brought about by the proliferation of mobile devices to build up a cashless eco-system is the dominant theme that industry players are facing. Increased intra-regional trade and cross-border transactions has also created demand for multi-currency and global clearing solution. To create a more efficient payment eco-system as well as facilitating greater regional economic integration in the region, a number of countries are upgrading their national payment systems to meet increasing demand for fast, secure transfers/payments .

Increased demand for speedy, cost effective and secure payment transaction
The payment services industry has been rapidly evolving, i.e. on a roller-coaster ride in recent years and there appears to be no signs of slowdown in its growth rate. Clients are increasingly valuing and demanding for fast, reliable and secure facilitation of payment services. The payment services industry has undergone dramatic changes in recent years. Where bank transactions were strictly seen as a strictly ‘over the counter’ process several years ago, bank transactions can be done virtually anytime and anywhere today. Innovation is entirely possible and essential for the payments services industry. To become instigators for innovation, banks are increasingly looking around at other technology-driven companies and spending on the development of their IT infrastructure to provide clients with speedy, reliable, cost-effective and secure payment services facilitation.

Many of central banks in Middle East in Kuwait, Qatar, Egypt, and Oman have not implemented practices that encourage automation or straight through processing due to heavy documentation requirements. As mentioned before the UAE Central Bank and government are the most advanced in the region looking to standardise and automate across the government and for regulations that promote digitisation. Direct Debit a new feature, also requiring less paperwork for entities to help streamline documentation. SAMA the central regulator for Saudi has also smart regulations however it is still very heavily dependent on physical documentation and handling such as checks and physical LC requirements. Many of central banks in Middle East in Kuwait, Qatar, Egypt, and Oman have not implemented practices that encourage automation or straight through processing due to heavy documentation requirements.

Secondly, companies should aim to maintain sufficient readily cashable resources not only to ensure payment obligations are met when they fall due, but also to meet these obligations at a reasonable cost. This is primarily achieved by maintaining a broad base of funding sources and a well-diversified portfolio of highly liquid assets. As the best source of liquidity comes from within an organisation, the treasurer should look at solutions to liberate cash through optimum working capital management.

MEA has the regional platforms as well as the supply chain financing. Many banks have chosen to align themselves from the Middle East either with Africa or Asia. In the Middle is rare to see a truly regional leader or bank from the domestic players. Citibank is still highly regarded for its cash management systems as some banks were converted from Citibank to local banks such as Samba Financial Group. Despite this in the entire market HSBC is the dominant bank and who the domestic banks see themselves competing against. The exception in Jordan and HSBC has pulled out of this market.

In terms of supply chain financing & structured finance it would be close competition with Qatar National Bank and National Bank of Abu Dhabi. Qatar National Bank’s strategy is to be leader across Middle East & Africa, acquiring shares in Ecobank Group which is present in 30 African Countries. It is positioning itself for European corporates who want access to these markets. National Bank of Abu Dhabi’s major focus has been on gateway across Asia, Middle East and few selected markets in Africa

Barring a few notable exceptions what is missing in MEA based banks though, and which can be adopted from APAC best practices are E-Alerts, In-house IT company, Real time payments systems & Customisable apps platform. The industry is increasingly moving towards electronic platforms that automate payables and receivables and subsequent account reconciliation, thereby enabling a holistic view of customers’ entire portfolios in real-time. In this case, Deutsche Bank enhanced its electronic banking platforms to support new clearing systems such as FAST in Singapore and KFTC real-time domestic foreign currency clearing in Korea.

With the rise of the regional transaction banking and shifting of priorities, regional banks have made strong in-roads to the international transaction business particularly in terms of market share. Today’s global economy is being driven more by investment and to a certain degree by domestic consumption that export led growth. Supply-chain finance (SCF) is emerging as the next frontier that manufacturers and retailers are focusing on to drive financial advantage over their competitors. So it does involve getting the right products to the right customer at the right time and under the right cost and quality standards.

All of these strategic competitive challenges are driving the need for greater STP integration as well as product integration with end to end solutions across cash, trade and treasury services. A strategy to integrate the operational data of cash management, trade finance, forex, payments, capital market sell, treasuries etc. is much needed to drive a consistent operating model across customer segments. Singular focus on product and divisions may be profitable in the short term, but detrimental to growth and competitiveness in longer term.

To thrive in the new environment, bankers will need to realign their organisational strategies to address the capabilities, objectives and starting positions of each institution they pursue, whether it’s a regional institution or local business. Targeting specific market segments enables institutions to develop more compelling customer value propositions.

Global transaction banking business at many banks will need a total transformation to support evolving business, operating and technology model. Global transaction banking customers are challenged by the diversity of their ecosystem and dependence on third parties for completing their end-to-end transactions. Speeding up client onboarding. centralising of client mid and back office functions, consolidation of standardised services activities to regional hubs, implementation of customer segment specific coverage model, arming front line relationship managers with data that they need to close and service business, etc. are areas where banks can further innovate to differentiate themselves.



Categories: Cash Management Cycle, Payments, Risk & Compliance, Risk and Regulation, Risk Management, Technology & Operations, Transaction Banking
Keywords: MEA, Gulf Banks, Saudi British Bank, NBAD, Cash Management, STP, IT, Regulation, Compliance, APAC, Payment Channels, KYC, AML, Risk Management, Transaction Banking, Payments, Citibank, QNB
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