How do you place JPMorgan in the competitive landscape?
The cash management banking market in Asia is more segmented than it was three to four years ago and there are now three clearly defined categories of banks. There are the local banks, which are getting stronger and stronger in their cash management offerings with each passing year. Then there are the regional banks and these are foreign banks with local branch operations. We fit into the third category which is the global category – a bank with a strong global infrastructure and a regional presence supported by a seamless network of banking partnerships.
And how are the banks in each of these categories performing?
The local banks are becoming more competitive and are busy investing in the products necessary to improve their offering. Several years ago they recognised they were losing some of their biggest clients to the regional players and now they are arming themselves to deal with this competition. We are helping them do this by giving them advice and, in some cases, white labelling our services. In my view the regional banks are being squeezed as a result. These banks are caught in the middle because they don't have the global infrastructure or organizational strategy to compete with the truly global banks and they don't have the domestic penetration to compete with the local banks.
So you believe that having a string of local branches is not necessary for JPMorgan. That a network of partnership banks is enough to meet the needs of your clients?
Absolutely. As a global/regional bank we specialise in cross-border activity, liquidity management and high-end type solutions. By utilizing our technological superiority and using this to access a network of partner banks in each country we can tap into local in-country services wherever we want. And yes, this is an optimal solution for the needs of our large multinational (MNC) clients. We have one of the largest virtual branch networks through our contractual relationships and our technical links with top-tier domestic banks.
With the domestic banks improving their cash management capabilities, can you see a situation where an MNC would go direct to a local provider?
They could; it depends what makes sense for the customer. But most of our customers require a regional or global solution with one front-end, one provider of cross-border liquidity facilities and one set of customer service people to deal with. However, with our structure, the domestic banks get the volume anyway.
What changes have we seen in the way the market operates, particularly in view of the poor economic conditions?
A lot of large MNCs are not taking their business out to RFP anymore (referring to the practice of selecting a bank through a due diligence process that starts with a Request for Proposal). Many of them have now been in the region long enough to know what players are out there and what their core competencies are, so the customers are going direct to the banks. The RFP process is elaborate and time consuming, taking months or even years. It's also expensive and in this cost constraint environment when the focus for large corporations is on reducing working capital then it is not something that a company will decide to do lightly.
Are customers consolidating their accounts with one bank to cover the entire region, or are they still using more than one?
This varies from customer to customer. It often depends how demanding they are in terms of their needs. If they have upcountry factories and large distribution networks in the more difficult markets then this will probably require them to use more than one bank or utilize a bank with network partnerships.
Is it possible to operate a really profitable cash management business in Asia at the moment?
A lot of banks in the region have lived on the fat of deposits for many years and, now that interest rates are at record lows, they are feeling the strain. These banks were providing their cash management services for free because they could make enough money from the interest earned on deposits. Now that this income stream has dried up they're starting to charge their customers for cash services. It is a new process and one that the customers find hard to cope with. But at the end of the day it will create some transparency in pricing, which is something that we have always been pushing for. Transparency will be a healthy thing for our industry.
Can you offer competitive prices given that you have to pass on the fees charged by your partnership banks?
Yes, and this goes to prove my point about why the global/local banks are being squeezed. All of our partner banks are major players in their local markets with large transaction volumes. We leverage their scale and get a good price for their services. This price is lower than what a foreign bank operating in that market could produce the services for. But we admit that we are never going to be the bank with the lowest prices. Our target market is less worried about the transaction price and more worried about the value we can create for them.
What's your strategy for improving profitability in the coming year?
Clearly volume is a big driver in the cash management business, but we can also improve earnings by specialising in high-end products and charging for that specialisation. In this way we can really add value to our customers and be a solution provider rather than a product provider. An example of this innovation is the just-in-time funding solution that we developed for Cisco.
What sort of news are we expecting from China this year that will open up the market to foreign players?
There is a whole calendar of events laid out in the government's three to four year plan of commercial banking deregulation. Clearly this is a key growth market for us. We see trade volumes increasing as MNCs move into China to do their manufacturing. A significant number of state-owned enterprises are also wanting to do a better job of managing their cash across the globe and we are already working with them on this.
But is there any particular announcement you are waiting on from the Chinese government?
Obviously foreign exchange deregulation and more investment options are important but in my view there is no silver bullet that will break open the Chinese market to foreign banks. This is different for commercial banks which are eagerly awaiting for changes in retail banking regulations. For the moment, we will continue to rely on our partnerships with strong national banks.
What can we expect to see from JPMorgan on the product development front this year?
We rolled out the second generation of our Internet product late last year and this year will see the conversion of more customers to that platform. We will also be launching some new e-trade products and some more liquidity management products in line with the ones we announced last year. On the procurement front we will be fine-tuning our e-payment product line that automates the procurement process for companies that buy across the region. This is something we originally developed for Caltex and we have now turned this into a standard service offering. In summary, we see real value creation in helping our customers improve working capital ratios by moving deeper and deeper into the payables and receivables value chains.