Banking is one of the few industries which
remained relatively relatively untouched by the wave of innovation brought by
advances in telecommunications over the past twenty years. However, there are
signs that this is beginning to change and if Angelist, an online venture
capital platform is anything to go by, innovation is the financial sector is
catching up and indeed, overtaking many other sectors of the economy. The site
lists over 8,000 financial startups with an average value of $4.2 million[1].
Many offer products which seek to make traditional banking processes more
efficient.
On the side of corporate banks, competition
from innovative startups is not the only incentive to introduce new products.
Legislation such as SEPA[2]
is forcing banks to rethink generations-old fee-based models. Non-financial
corporations themselves are becoming increasingly savvy in financial
transactions, often with their own currency exchange departments and so-called
payment factories to take on functions once managed by corporate banks. In
Asian and African countries, banks have had to respond to the relative threats
of mobile payments and micro-finance firms. The 2014 global banking survey by
EY revealed that managers are now inclined to look elsewhere for products if banks
aren’t willing to provide them (see below).
This wave of changes has forced a re-think on
the part of corporate banks. A laissez-faire attitude of taking a small margin
on every transaction is being replaced by a more dynamic attitude whereby banks
know that they can no longer depend on old methods of working – much in the
same way that most other industries had to face up to this reality ten or more
years ago. This paper will look at how this has led to a spate of new products
being developed by corporate banks and non-financial corporations as well as
how the future is likely to play out given the changing landscape of corporate
banking.
The introduction of SEPA
As soon as the Euro
had been introduced, the discussion began to introduce an EU-wide payments
system. Until SEPA, cross-border payments in Europe were made by banks in
fragmented national markets. To some extent, the banks were the only ones to
gain from the fragmented nature of the markets – their fees for money transfers
before the implementation of SEPA were estimated at 2-3% of EU GDP in 2007.[3]
A 2013 report by accounting firm PWC estimated that the introduction of SEPA
would lead to the closure of 9 million bank accounts across Europe[4].
A report by Capgemini found that in every conceivable scenario under SEPA,
banks lose significant revenues.
Nevertheless, banks
have been creative in their response to SEPA. HSBC and Deutsche Bank, for
example, have embraced SEPA through one-day credit transfers (the regulated
minimum is three days) as well as SEPA-wide direct debit facilities.[5][6]
One way in which banks seek to maintain payment fees is through a tiered
offering (fees for transfers within a day and fees waived for three –day
transfers). SEPA has unlocked the potential of banks to provide e-invoicing
services and other value-added services for corporations. An industry report by
money-transfer firm ACI[7]
notes that examples of such value-added services include, ‘the reporting of
timely, accurate and full payment information in flexible formats,’ and
‘comprehensive analysis of payment information.’
These changes mean
that a corporation which once had 1,000 separate bank accounts now might have a
reduced number of bank accounts and one online banking interface[8]:
a considerable step-up in efficiency. SEPA is also being used, somewhat
inevitably, by one unnamed EU SEPA-compliant bank to exploit payments made
through Bitcoin, the controversial cryptocurrency[9].
Others are expected to follow. Finally, SEPA is not alone as a single-payments
area. Others include SDAC, IPFA, SML, WAMZ and WAEMU, all suggesting that there
will be further innovation down the line from corporate banks to deal with
falling payments fees.
Treasury Management Innovation
The
advent of SEPA and the subsequent consolidation of corporate accounts
inevitably leads to issues surrounding cash pooling and treasury management in
general. Historically high cash holdings together with a prolonged period of
near-zero interest rates has led to the introduction of the earnigs credit rate
method (ECR)[10]. This
method began in the US before reaching Europe and China and has effectively
forced banks to re-negotiate their treasury management fees with corporations.
Amit Agrawal, EMEA head of liquidity management services at Citibank says, ‘if using ECR, we would
negotiate the pricing terms, which can mean a reduction or better pricing being
introduced.’
The
huge cash reserves, combined with improved telecommunications has allowed
corporations to become hybrid-financial entities, operating what has become
known as ‘in-house banking.’ Corporate banks are therefore seen more as
complementary to centralized treasury functions as opposed to taking near
control of them. In some cases, banks now gain fees by offering white-label
banking[11]
services in payment processing (in areas as mundane as transferring customer
funds between two different stores), liquidity management and collections
functions.
Elsewhere
in corporate cash management, there is the ongoing coversion from traditional
cheques to image-based cheques. Until now, images of these cheques have been
distributed to corporations by banks on CD-ROM[12].
Now, banks are offering their clients internet-based transfer of cheque images.
The advent of file-sharing platforms has allowed banks to improve this service
at the same time as offering other high-volume transfer services for their
corporate clients so that the channels of communication are faster and
operation costs are lowered.
The
new movement in treasury management isn’t just about new products, however; a
BCG report[13] into the
changes that banks are undergoing found that corporate banks are failing to
leverage the vast troves of client data they possess – particularly in treasury
management. This means predicting which products are required as much as the
process itself of developing those products. Corporate banks that use
wallet-sizing analytical engines can be used to identify the next product that
will likely be required by each individual client. The feedback that can be
gained from banks’ clients can also be provided to other similarly-sized
clients to show supplier or customer behavior.
All
of this is good news for banks and bad news for treasury managers. A job which
has mostly been about cash management becomes increasingly easier as
data-driven tools to measure cash flow management become more accessible.
Trade Finance
Bank
Payment Obligations (BPO) are the new currency in trade finance, offering a
signal of the change which international trade finance is undergoing. An
October 2011 report by HSBC[14]
forecast world trade to grow by 73% between 2011 and 2025, representing y-o-y
growth of over 4%. This may have been one of the motivations behind the ICC and
Swift to establish BPO, an automated and securing method of processing of
international payments. The process eliminates the traditional requirement for
a letter of credit, paperwork and administration, physical presentation of
documents and manual processing[15].
The big change is that the exchange will now be data rather than documents -
All of which serves to lower corporate banks’ operating costs. The usage of
trade finance products as of 2011 (see below) is already changing considerably.
Dutch
Bank ING has developed a web portal, Aleo, for its corporate clients, which
allows them to conduct trade with each other. It claims that Aleo has an
advantage over other B2B platforms such as Alibaba, in that it offers ‘the
consolidation of various commercial and banking processes within one platform.’[16]
By the bank’s own admission, the Aleo platform was established to create added
value for their clients, who they could see from their banking records, were
processing very few payments online. It’s also clear that the idea is one way
of regaining some of the fees that will be lost through some of the innovations
discussed here.
So
far, BPO has really only taken hold in Asia, with that continent accounting for
up to 70% of all transactions until the final quarter of 2014.[17]
But perhaps cross-continental transactions is where BPO is set to have its
greatest effect: where companies of different nationalities doing business for
the first time will be able to skip all of the paperwork once associated with
trade finance, considerably speeding up the process and cutting back on costs
in the meantime.
The Future of Corporate Banking Products
To
gain some insight into how banks are finally taking innovation seriously, one
need look no further than Wells Fargo & Co; the US-based bank has over 700
employees who it claims are involved with innovation and 5,800 involved in
product developed[18].
Citi Venture, a venture capital firm owned by Citibank, has the license to
invest in financial startups and any other firms that are ‘solving critical
challenges in areas that are relevant to our (their) businesses.[19]’
Banking innovation now has financial capital to back up the sentiment.
The
first change we can reasonbly expect in the future is far more sophisticated
usage of the huge swathes of data that banks have access to. While people feel
violated that social media is an intrusion of their privacy, they forget that
banks have an overview of every transaction they’ve ever made. This data on
where and how much you’ve spent in the past provides insight into how you’re
likely to do so in the future. Banks haven’t even touched on the potential of
this. It applies equally to retail and corporate clients and is likely to shape
many of the products that are developed in the coming years – and of course,
when those products are offered and to whom.
Banks
have always been excellent at segmenting their clients. The adage that a
company should treat clients fairly but
not equally was most probably
developed by a bank. Banks following this adage, combined with more productive
usage of their clients’ data, will allow them to maintain fees in certain
segments where their data can show that they don’t require being eliminated.
This applies to corporate, SME and SOHO clients just as much as it does to
individual retail clients. For example, a series of individual transactions by
employees of a firm in a foreign country – where it has an operating branch,
let’s say – may trigger a call from a currency exchange manager offering better
exchange rates – in turn, generating customer engagement and fees elsewhere.
The
segmentation may take different forms. Banks will know better than most not
that offering too much to clients who are happy with less only serves to
cannibalize operating margins. As such, we shouldn’t be surprised to see banks
take shares in many financial upstarts and in some cases, borrowing facets of
their business models. But suppose a large bank were to offer the exchange
rates that Xoom, Currency Fair or Azimo were to offer – overnight, the bank
would lose millions on the basis of margins and fees. Instead, it could
purchase shares in such a startup, or found one itself, and gain an option on
the more financially savvy financial consumers’ transactions while not losing
higher the higher margin business that it previously had.
By
2018 – only three years away – more than 50% of incremental revenue in banking
products in Western Europe will be digital[20].
Yet somehow it feels as if banking lags behind other industry sectors in
digital. This may be at least in part due to regulation but also due to
extremely low propsensity of clients to change their bank. Banking products
will be available on more platforms and are likely to be less clunky than they
currently are (even if large strides have been made in interfaces and user
experience over the past five years). Corporations can expect instant messenger
services at a minimum in the short- to medium-term.
In
the medium- to long-term, we can expect a sort of liberalization of finance
tools on digital platforms that mirrors deregulation of banks in the 1980s and
1990s. Junior RMs at corporate banks should be worried for their jobs when data
and AI become sophisticated enough to manage 80% of the client relationship
without them. A generation brought up on instant messenging and social media
means the relationship between a company and a bank will inevitably develop
more on a laptop screen than had previously been the case.
The
new digital relationship confronting banks creates several possibilities:
Billions could be transferred between one account and another to take advantage
of interest rate movements or currency swings; transactions worth millions
could now be carried out without ever requiring a business to contact their
bank (with built-in safety measures, naturally) and companies with more than
one bank could structure on-screen transactions using terms available from both
banks. In short, the future is likely to benefit the consumer and the
corporation more than banks so banks will need to respond accordingly.
[4] http://www.sepaforcorporates.com/single-euro-payments-area/sepa-benefits-of-sepa-according-to-pwc/
[5] http://www.hsbcnet.com/gbm/products-services/transaction-banking/payments-cash-management/europe/single-euro-payments-area/products.html
[7] ACI (2014), ‘The SEPA Challenge: An Industry Report.’
[8] http://www.sepaforcorporates.com/payments-news-2/9-interesting-payment-factory-insights-sungard/
[10] Calculated as the amount of interest in corporate bank accounts
which is then used to pay for banking fees
[13] https://www.bcgperspectives.com/content/articles/financial_institutions_business_unti_strategy_five_trends_disrupting_corporate_banking_landscape/
[16] http://e-point.com/projects/aleo
[17] http://www.gtreview.com/news/asia/asia-leading-bpo-adoption/
Very helpful! thanks!!
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