Self awareness is rare in banking. But for many of the global banks, the penny does seem to have dropped that they cannot be all things to all clients. Pre-crisis, the talk was of end-to-end solutions, being on both sides of the trade and having a full global footprint. These days the ambitions are more tempered.
Banks are facing huge external challenges: liquidity is at a premium; regulations are being drafted that will punish extended global operations and transactional banking business; and capital costs are all on the rise. Banks know that they will have to do more with less. And one of the key strategies they are adopting in the face of this onslaught is collaboration.
Collaboration has a slightly sinister undertone, essentially implying that one is consorting with the enemy. Many banks must feel this is true for their business. They are being asked to work with the institutions with which they have competed tooth and claw. It is a sea-change in what is being required of them and yet banks are rising to the challenge.
The first and perhaps most difficult phase of this process is working out who has the best service offering in any particular area of the business, from payments, to FX, to cards, to trade processing and reconciliations. Senior bankers say that these discussions are going on right now throughout the industry. “There are some very sensible discussions going on at the moment about who is doing what and this will lead to much more collaboration,” said Karen Fawcett, global head of transaction banking at Standard Chartered in London.
Underpinning the desire for collaboration is the understanding that much of what banks do is not only a replica of what other banks do, but that it doesn’t actually make any money. As a result, outsourcing these irrelevancies is good for the bottom line. “Collaborating takes the non-value-add out of the equation,” said Marcus Treacher, head of client experience, global payments and cash management at HSBC in London. “As a bank, we continually seek to outsource non-core activities such as messaging to external service providers, such as Swift.”
The question for bank clients, especially those who are banks themselves, is when does it make sense to compete and when to collaborate? The best way to answer this is by example. This October, Agricultural Bank of China (ABC) signed a deal with Deutsche Bank to work together in payments and cash management. Under the terms of the deal, ABC will use Deutsche’s global payments platform for cross-border payments as well as FX4Cash, Deutsche’s global FX payments system.
“Building on our already strong collaboration with Deutsche Bank, we have decided to extend our payments and cash management relationship to span the globe,” said Chen Shangyuan, deputy general manager of the operational management department at ABC in Beijing. “We look forward to increasing business as we leverage Deutsche’s strengths as a leading euro and US dollar provider worldwide. Additionally FX4Cash will allow us to further grow our product suite using our extensive distribution.”
In other words, it makes great sense for ABC to collaborate with Deutsche in an area such as global payments where it would take years and billions of dollars for ABC to be able to compete. Moreover, by using the FX product, it can tap into a technology and footprint that is already on the ground and then use that to drive its own business. While ABC might compete with Deutsche in many other areas of banking, in this arena it makes sense to collaborate.
One trend is emerging that sees competition within the space of collaboration. Many banks have rolled out platforms that allow them to be the interface between a company and all its existing banking relationships. This is supposed to make the banking experience much more fluid for companies while also allowing the banks to work together.
HSBC this month launched its own such business, called the Managed Payments Service. This will give corporate clients STP capability for all their banking relationships. It will give account level intra-day reconciliation as well as anti money laundering screening capabilities.
“Financial institutions are increasingly looking at how managed payments can increase efficiency and improve risk controls,” said Andrew Long, head of global transaction banking at HSBC. “[The new service] allows institutions to outsource back office payment processes in a flexible way, tailored to their needs and existing structures. Customers can enjoy the benefits of access to a large global bank whilst retaining their current relationships, allowing them to concentrate on building the business.”
Another collaborative solution being rolled out to address a specific set of problems is Citi’s multi-bank global trade programme, which allows a group of banks to originate and fund trade finance assets through the issuance of structured trade-backed paper. “Each bank may rationalise its participation differently, such as a greater need for capital relief versus funding and liquidity,” said Emmeline Wexler, global head of Citi’s trade asset advisory. “Collaboration among the participating banks, sharing a common goal of creating the most efficient funding platform to support the financing of global trade flows is ultimately the most important ingredient to achieve success.”
While this sounds highly plausible in theory, in practice, collaboration could be a measure that is seen by most banks as a temporary solution to a unique set of global problems. Most of the collaboration will be between global banks and local banks, as opposed to between the global banks themselves.
In the meantime, company treasurers and CFOs can enjoy the spectacle of banks trying to demonstrate how much they like to work together as opposed to bad-mouthing the competition. Long may it last.
This story was first published in the Cash Management supplement of the November 2010 issue of FinanceAsia magazine.