Thursday, 23 May 2024

Relooking the transaction banking value proposition

5 min read

By Foo Boon Ping

The combination of slowing global economic growth, record low interest rates, increasing costs of regulatory compliance, and pace of financial disruption that demands greater investments is making many transaction banks relook their business propositions and operating models.

  • Banks are investing in resources to better appreciate and understand the risk appetites of customers 
  • As customers’ priorities change, it’s important for banks adjust their business structure and adopt customer-driven strategies
  • The importance of collaboration between banks and with fintech firms will drive business solutions

The limit on fines being slapped on the global banks from sanction and other compliance related violations is continuously pushed higher. Deutsche Bank currently faces a potentially jaw-dropping $14 billion fine from the US Department of Justice on dodgy mortgage deals that in part led to the US housing loan and property collapse of the late 2000s. The actual fine that the German bank will likely end up paying may be closer to the $8.9 billion dished out by BNP Paribas, the largest fine imposed on a foreign institution so far. Notwithstanding the lower fine, it will have serious impact on the bank’s capital position and affect its ability to operate as normal.

Banks are paying close attention to compliance related issues on financial crimes, cyber security and technology risks and are seeking to de-risk their businesses and operations, even if it means paring down their core business, geography and operational footprints. To borrow a modern business cliché, it has become the new normal, a part of doing business in the post global financial crisis environment.

Diane Reyes, HSBC 

“We are always looking at our customer base and we are always looking to de-risk. I think everyone is. It’s prudent for shareholders, it’s necessary for future continued growth and also it’s required by the regulators. And we have invested and today we have a large compliance organisation,” remarked Diane Reyes, global head of global liquidity and cash management at HSBC, largely echoing the sentiments of many in the industry.

De-risking is not necessarily bad for business, in fact, it may be good and essential for sustainable growth. A number of transaction banks speak of how they are repositioning their transaction banking business for growth in spite of a very challenging operating environment.

Building deeper and broader relationships

Global banks such as Wells Fargo have also invested significant amounts of resources and time to develop world-class compliance programmes that allow them to better appreciate and understand clients’ risk profiles and appetites.

“Risk appetite needs to be aligned. We have been working with many of our customers for some time so this is not new. In the majority of cases where there is a reduction in the number of customers, overall revenue has doubled. This is because we are able to spend more time with the (remaining) clients and, therefore, broaden and deepen those relationships,” explained Jafar Amin, the incoming senior head of Wells Fargo’s operations in Asia.

De-risking by the global banks is creating opportunities for smaller banks or banks that may not be as active in the past, to do more.

Jafar Amin, Wells Fargo   
Paula da Silva, SEB  

SEB, Skandinaviska Enskilda Banken, one of the largest Nordic corporate banks, sees this as an opportunity to do more with its clients in the region. The bank’s head of transaction services, Paula da Silva, commented: “We have a strategy of being extremely client driven, and to facilitate and build our clients’ banking relationships, especially in emerging markets. This is perhaps against the trend of de-risking we see with some global banks. Our clients are equally as big as we are, and traditionally we have been working with them for more than 150 years. If we had to choose between de-risking and working closely with our clients we would choose the latter.”

And the clarity and focus on the core customers and business proposition become increasingly important.

Marcus Sehr, global head of client management and sales in institutional cash at Deutsche Bank shared this perspective: “Transaction banking is a scale business. You need scale to provide a level of automation and efficiency, to invest in products and IT solutions. Not everybody can afford the required level of investments. To remain successful, it is very important to define what is the core business and it is equally important to know what you are not doing than what you want to do.

Sehr added: “The other aspect is not only to ask yourself what are the next products. The question is what is on the client’s mind, what adds value for the client?”

Marcus Sehr, Deutsche Bank

Amin agrees: The core proposition isn’t going to suit everybody and we don’t want to be all things to all people but we know what we want to do right.

The customers’ priorities

Wells Fargo provides corporate, commercial and financial institution customers and Asian multinationals with key products and services including USD payments and clearing, financing, investment banking and markets, asset management and trade. With regards to its trade services, Wells Fargo also offers a tailored service called Trade Accelerate for select US corporate clients operating in Asia. The service is currently registered in Singapore and Hong Kong.

Kai Fehr, Wells Fargo

“We want to be the best in class service provider for our clients, we want to be the ‘easy to deal with’ bank. This is where we spend the time and establish the dialogue between our operations team and the client. Our trade finance operation is part of the deal team, and with this approach we win market share through operational excellence,” Kai Fehr, Wells Fargo’s head of trade for Asia Pacific elaborated.

Banks adjust their business structure as customers’ priorities change. HSBC recently renamed its global payments and cash management business to Global Liquidity and Cash Management. Reyes explained: “We changed the name to amplify the focus on liquidity given the market situation and given what our customers need.”

Based on analysis of customers’ activities, HSBC found that the majority was in the liquidity space and the complexity around these requirements was growing.

“We took a fact-based decision and looked at the last three years of internal CRM data and pipeline management to be sure that this was what we thought it was,” she elaborated.

Corporates are facing significant economic challenges, not just in terms of slowing trade and investment growth but a sustained low interest rate environment, and in some countries, negative rates. Moreover, they have a record level of cash holdings. This is another reason why Reyes believes that liquidity is the key area of interest for corporate treasurers who are seeking more efficient and productive solutions to manage their excess cash in order to improve the return of equity. 

A third challenge for the bank is the Basel III capital requirement under the Liquidity Coverage Ratio rules that classify deposits as either core (operational deposits for daily activities such as payments and working capital) or non-core (non-operational deposits or surplus cash for investments) that attract different levels of capital and mean different costs to the bank. Corporates’ excess cash cost the large banks such as HSBC more to manage under Basel III requirements and therefore, lower customers’ returns on them. HSBC has devised alternative solutions for corporates to get better returns on their excess cash. Its Liquidity Investments Solution was introduced in July to address this issue.

“We continue to meet our customers’ needs. We value our long-term relationships with customers so we are trying to find a solution to give them some earnings and to continue to maintain our mutual relationship. This product allows them to choose the amount of money which will be put into the investment,” Reyes explained. 

The critical aspect is that they are able to put the money into triple “A” rated money market funds as opposed to the bank balance sheet. It also helps our bank because it is treated as off-balance sheet. “It’s a win-win,” quipped Reyes.

HSBC runs the investment platform that gives corporates four options, comprising triple “A” rated money market funds from its associated firm, HSBC Asset Management, as well as from leading third party providers such as BlackRock, Goldman Sachs and JP Morgan. 

Over 50,000 of its customers are using these liquidity services. She explained that the scale that HSBC is able to put through the platforms benefits its customers. The volume has expanded beyond the traditional multinationals and included an increasing number of emerging multinationals from Asia. 

Reyes remarked that for its Asian strategy to succeed, it is critical to continue investing in payments and e-commerce solutions. Despite the difficult economic environment and constraints that some banks are facing, HSBC rolled out its new corporate online financial management platform, HSBCnet, that among other integrated solutions for payments, cash management and trade and supply chain finance, streamlined the onboarding processes for customers that operate in different locations. 

“We are committed to the market and our customers in Asia.” She added: “We are now looking at what’s the next phase of investment as part of our pivot to Asia with a focus on China – and particularly the Pearl River Delta, where we recently launched a new e-commerce platform. This e-commerce platform not only allows HSBC to open accounts more quickly, but it also accelerates the settlement of customers’ payments.”

The importance of collaboration

Given the amount of investments required to develop new platforms and solution as well as the complexity involved in integrating different channels, banks are increasingly looking at collaborating with one another to offer customers choice.

“Relationship is the most important thing. The Japanese banks put a premium on relationships and this is certainly central to our philosophical vision at MUFG. The cornerstone of demonstrating the value we place on relationships, I believe, is flexibility. Flexibility in the way we deliver our products and solutions, either organically or through alliances and partnerships, and the manner in which we understand and respond to our customers’ needs,” said Azim Walli, head of trade and supply chain finance products, Asia and Oceania, at MUFG. MUFG is the biggest of the Japanese megabanks that is looking to further solidify its global transaction banking business in Asia.

Azim Walli, MUFG

“Banks need to collaborate more with fintech firms. One of the areas that is attracting such collaboration is distributed ledger technology or blockchain, which has the potential to transform the way banks work with each other and with their clients.” Paula da Silva believes that this will be a game changer and will be a real threat to the traditional players if they do not adapt to change.

“We take pride in collaborating with other banks many of which we have strong relationships with. The way of doing transaction and correspondent banking will be totally changed and it will be much more efficient. It is unlikely that all players today can exist tomorrow because you need to invest,” she quipped.

Jonathon Traer-Clark, Bank of America Merrill Lynch

However, new technologies also have the potential to create new opportunities and businesses, Jonathon Traer-Clark, head of strategy, global transaction services at Bank of America Merrill Lynch, has a somewhat sanguine view of the future.

“Technology will present new opportunities and new ways of doing business. I think our portfolio of services and solutions will be enhanced and potentially expanded as a result. This means new opportunities for us and our clients,” he concluded.

While a lot of attention is currently focused on compliance and security issues as well as new technologies such as block chain, conversations around the business of making money remain unabated and banks know the dialogues must always start with the customers.

Keywords: Deutsche Bank, BNP Paribas, Wells Fargo, SEB, HSBC, MUFG, CRM, Blockchain, De-risking
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