Transaction banks: The chicken or the reg?

Laurence Neville
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What comes first for transaction banks? Their financial institutions clients want them to help meet new challenges – especially around regulation and depressed earnings – through innovating new products. But the big cash managers find most of their technology budgets focused on dealing with regulatory burdens.

Financial institutions are under pressure from a weak operating environment and seemingly unending regulatory change. The scale of the challenge is prompting an unprecedented level of soul-searching among FIs. As Peter Jameson, head of GTS FI product and network strategy, EMEA, at Bank of America Merrill Lynch, notes: "Banks are shifting from trying to be all things to all people to focusing on what they do best."

As a result, the global transaction banks that meet FIs’ cash management needs have had to up their game. "We increasingly find that clients want to hear about alternative business models and gain insights into what their peers are doing," says Jameson. "As global players, we can add value and help FI clients find cost-effective solutions that still allow them to meet their clients’ needs."

There are no right or wrong answers to the challenges of regulatory change and the backdrop of moribund growth. The unique circumstances of every FI must determine how they re-shape their organizations to face the future. That does not mean that FIs have to face these challenges alone. Global transaction banks are falling over themselves to proffer advice and solutions to help them. However, it is the FIs that must decide their strategic direction.

The world might have pulled back from the abyss of the financial crisis, but the global economy remains precarious. "FIs are navigating a low-growth environment across many of the most developed markets," explains Lewis Warren, global client executive for financial institutions, healthcare and federal government, treasury services at JPMorgan. "EMEA continues to be complex while growth is decelerating in China and India."

Institutional investors are seeking a certain level of return to invest in FIs, driving firms to seek top-line revenue growth that contributes to higher profits. "As a result, there is increasing interest from clients in M&A, either to expand product capabilities or geographical footprint," says Warren. "In addition, FIs are looking to expand in growth markets and are targeting specific market segments where they expect growth."

Necessarily, growth is unlikely to come from the developed world, given the economic situation. "Therefore, to get growth in earnings there is an increased focus on emerging markets," says Warren. "If you look at the leading FIs in any sector, you can see that they have identified growth markets in regions where there are opportunities: for example, many are looking to major markets in Latin America, or are trying to target the growing middle class in China."

Companies wanting to expand in emerging markets need international solutions for payments and liquidity that enable them to centralize functions for easy access, control and visibility – creating a big opportunity for global transaction banks that have capabilities in emerging markets. At the same time, FIs are seeking solutions in developed markets to improve efficiency to pay for their expansion in emerging markets.

"FIs are increasingly implementing treasury service centres for the regions they operate in and are looking for appropriate technology solutions," says Warren. "For example, in sophisticated markets such as Hong Kong or Singapore, they want to use mobile technology to reach their end clients. To meet those needs, transaction banks that serve FIs need to invest in technology."

Although the fragile economic backdrop inevitably informs every decision made by FIs, it is the regulatory onslaught that is the primary driver of strategic change in the sector. "While regulation concerning our clients – as well as ourselves – can be broken down into global measures such as Basle III," notes Marcus Sehr, global head of cash management FI product at Deutsche Bank: "semi-global measures such as Vickers or Volcker, and local or regional measures such as Sepa, Dodd-Frank and Fatca, they all result in three outcomes: more investment, more effort and less profit."

Complying with these many measures is challenging for FIs and is prompting increased interest in sourcing solutions from global banks or technology providers rather than building them in-house.

One particularly pressing issue is Dodd-Frank section 1073, which has been introduced to address a perceived lack of transparency in consumer payments from the US to the rest of the world, particularly in relation to the costs associated with payments. Specifically, it applies to electronic transfers of funds (via Swift MT103) from a consumer in the US to any designated recipient in a foreign country and requires banks to itemize costs for consumer cross-border payments.

"Smaller, downstream banks want to continue to serve their customers’ cross-border payment needs but might not be able to invest in the technology required to comply with rule 1073," says Warren at JPMorgan. "Therefore they are turning to alternative solutions."

When the guidelines for implementation (set for October 28, 2014) were published on April 30, the originally proposed measures had been relaxed. The changes were welcomed by FIs. However, the relaxation highlighted the risks for smaller banks of developing their own solutions for regulatory compliance. "Regulation has a tendency to change even close to its introduction deadline," says a senior transaction banker. "FIs can easily get burnt."