Ask almost any bank about their international ambitions in recent years and you would get the same response: We’re not looking to expand for expansion’s sake, but we will go with our clients where they want us to go with them.
But is that still really the case? Pressured by costs, falling revenues and regulation, many banks are starting to ask the question: If we expand our geographic footprint to support our clients, are we going to generate enough revenue to make the costs and the risks worthwhile?
Then there are the challenges facing the few banks left with truly global ambitions. Once, they took pride in having a presence in as many countries as possible. Global expansion seemed a goal in itself – the profits would surely follow. But, generally, they did not. Costs rose and profits fell. Stricter know-your-client (KYC) requirements turned the conversation away from global banks being too big to fail, to simply being too big to manage.
Leda Glyptis, a director at consultants Sapient, says: “Historically there have been two assumptions with a bank’s international presence: that global is good and that it does not have to be deep. Neither of these is necessarily true.”
Whether it is RBS deciding to sell its transaction banking business outside the UK, HSBC selling its Brazilian business to Banco Bradesco, or ANZ pulling back from its ambitions in Asia, the era of global or even regional expansion seems to be drawing to a close.
Anurag Bajaj, global head of correspondent banking at Standard Chartered, says: “The number of truly global banks has declined as more and more institutions focus on their core markets to follow their strategy. In the recent past, many banks pursued opportunistic growth to expand beyond their home markets, only to find out that this strategy was not sustainable in the long-term.
“An eastern Europe bank, for example, chasing opportunities in Asia will suddenly find that the cost of doing business in terms of regulation and operations outstrips the opportunity.”
Instead, a new approach is emerging, with the correspondent banking network at its core.
“The period of global expansion is behind us,” says Glyptis. “While there is now stability, there is limited scope for additional growth. After a short period of concern and activity over what impact the cryptocurrencies could have on correspondent banking, it has quietened down again.”
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Leda Glyptis, Sapient |
Banks are becoming more specialized in their services, targeting key client segments and product sets. Dominic Broom, head of treasury services EMEA at Bank of New York Mellon, says: “Correspondent banking has moved towards selective specialism; leveraging non-compete local-global bank alliances that bring together experts in certain regions or markets. Institutions that have tried to operate across multiple regions or segments have for the most part been unsuccessful.”
But can alliances really fill the gaps and offer clients a seamless service? Will clients find particular products or offerings falling through the cracks? Or could it be possible that an alliance of specialists actually gives clients a better overall service?
The importance of having a strong counterparty network has grown, but comes with its own problems to navigate. Each bank has to decide which other banks it wants to work with. It is a detailed process. On top of the standard KYC and anti-money laundering (AML) requirements, there has to be an assessment of the bank itself. What is its culture and can the teams work well together? What are their standards on customer service, and do they match the bank’s own?
Magnus McNeill, head of banks and broker dealers at SEB, says: “Working through regulatory constraints, competitive aspects and confidentiality concerns is a complex exercise when determining which banks are most suitable as partners. It needs to be a bank with a similar culture. Is their approach towards customers the same as ours? Do they deal with customers personally, or refer them to a call centre? We’d rather not provide a service than provide it badly.”
George Koutzen, head of business risk and control management, global liquidity and cash management at HSBC, notes it is an important business decision; the bank must trust the correspondent to work to its own exacting standards.
“It is not a casual relationship when you engage with another bank, it needs to be strong as the partner will engage with your clients,” he says. “There needs to be proper due diligence and an understanding of operations. Through taking a disciplined approach, it is also how they can learn about how we operate.”
When a corporate signs an agreement with its primary cash management bank, regardless of the method in which transactions are completed, it is up to the bank to ensure it is delivering on the promised standard.
“Clients understand the need to use partners and we are always up front about this. But ultimately it is still HSBC’s responsibility to deliver,” says Koutzen.
Dub Newman, managing director, head of North America GTS, Bank of America Merrill Lynch, says the bank ensures the client receives the same consistent, high level of service, whether it comes from BAML or their partner: “We employ an integrated partner bank model, which we believe is the best way to serve our clients. No matter where in the world they conduct business, our clients can then receive a consistent experience – they’ll receive the same standard of service, the same contract documentation and access to our integrated technology.”
McNeill adds that clients will notice if there is a deterioration in service quality when processes move to the correspondent: “Many of our largest clients are extremely sophisticated and have a deep understanding of which service providers and correspondent banks we use. They notice when something changes or a process deviates.”
Historically there have been two assumptions with a bank’s international presence: that global is good and that it does not have to be deep. Neither of these is necessarily true – Leda Glyptis, Sapient |
Correspondent banking is at its core a relationship that needs to work for both parties. Just as a global bank will assess the risk of a small, regional or country-specific provider, the smaller bank must also evaluate the risks and rewards of the relationship.
“Correspondent banking is a two-way relationship,” says Broom at BNY Mellon. “Both parties evaluate their partners on an ongoing basis to examine whether their network remains effective, sustainable and best positioned to meet the evolving needs of the clients that it is designed to serve.”
Standard Chartered’s Bajaj reiterates this view of the mutually beneficial relationship: “When choosing the best bank partner in the market, you cannot simply just choose the bank – the bank also has to choose you. It is a two-way marriage, and both have to fulfil the standards of the bank they are accepting to work with.”
Complex network
The nature of correspondent banking means it works two ways. It is not just a question of big international banks looking for partners in smaller jurisdictions; the smaller banks need international partners too. And while two banks may not be equal in size and scale, do not assume that the smaller partner has less stringent requirements than the bigger one in any negotiations. A tie-up with a big bank making headlines for all the wrong reasons can have a knock-on impact for a smaller correspondent partner. And in the current environment, the smaller partner has to be wary of a sudden withdrawal from a product or service by a bigger bank provider.
Dena Stefanopoulos, senior director of product management at Silicon Valley Bank (SVB), says: “As a buyer of correspondent banking services, we have to be more diligent now and have contingency plans in place to ensure that we have a back-up provider for that market or service in case the incumbent exits. There is less stability and certainty to correspondent banking relationships today than in the past. The instability in the market could also open up opportunities for non-banks that choose to play in the space.”
A look into the network used by SVB shows how complex it needs to be. The bank has correspondent relationships to access clearing in 25 different currencies. The bank uses a combination of global financial institutions, such as Deutsche Bank for euros and Standard Chartered for Singapore dollars. But for smaller currencies, it also looks to the local financial institutions, working with Absa Bank on South African rand and K&H Bank on the Hungarian forint.
“There are many variables that factor into which banks to use,” adds Stefanopoulos. “Many banks have a formal request-for-proposal process to define the services they’re looking for and to qualify the top providers regarding risk and services provided. Then there are business issues to consider: competitive issues, service levels, other business with that bank across the enterprise, reciprocity.”
Glyptis at Sapient says more stable partnerships are emerging: “Operationally it makes sense. Unless you tie it with the partner, they could undercut you.” To keep both the correspondent bank and the corporate client happy, the global bank is under pressure to ensure they can offer an unrivalled service or they risk losing the business. If a corporate finds they could receive the same level of service at a lower price direct from the correspondent bank, they may not hesitate to move.
Glyptis adds that the big banks need to be sure they are offering the highest standard of product and services to ensure customer loyalty: “The whole package needs to be such that the big names offer the most obvious advantages. It won’t be done on price, so it needs to be through the bundled package.”
Not every bank has decided to hand over their operations to a correspondent network. Naveed Sultan, global head of treasury and trade solutions at Citi, says in his experience the banks do not need to be deep on the ground, but they do need to have some market presence in a region. Working at arm’s-length from the clients through a correspondent relationship is not the same as a direct relationship.
“Although it does not have to be substantial, a physical presence in a country is necessary. The expansion of the digital network does not mean being on the ground is becoming irrelevant.”
There are risks, says Sultan, of simply delegating your presence in a region to another bank: “Banks that do not already have a presence in some of the growth markets will find it difficult to do business in a meaningful manner. Lack of presence in these markets will not allow the banks to make as big an impact when these become more attractive.”
Choosing a counterparty
The choice of counterparty is an increasingly important topic for corporate treasury teams. They cannot simply delegate network decisions to their lead banks any more. They are under greater regulatory scrutiny themselves; they want to know who in the chain is handling their money at every turn, and they sometimes want to have a say in it too.
Susan Skerritt, managing director and head global transaction banking Americas at Deutsche Bank, says customers are taking a keener interest in specific markets and banks need to be on hand with the answers: “As certain markets open up and others become more difficult, it is not unusual for a corporate making a payment to ask a bank how the funds are being handled. If they are concerned, we will walk them through what it will look like. Corporates operating in markets where there could be questions are often very knowledgeable about the problems they face.”
It is a process that needs to be regularly monitored, as banks switch to new providers and shareholders change.
“As part of KYC, due diligence needs to be carried out on the ownership structure of the provider, unwrapped down to the beneficial owner. If there are changes this needs to be reassessed,” says Bajaj.
It is essential for corporates to be kept in the loop over who is providing which service to ensure they keep on top of their own AML and KYC requirements. A corporate may have carried out their due diligence on their chosen banking partner, but do they know the same level of detail on the banks lower down the chain? Simply trusting their bank to make the right choice will not cut it with the regulator.
Stefanopoulos at SVB says: “Corporates want to know who is in the network, and it’s often difficult for them to keep track of all the changes, some of which may impact their business operations. They rely on their bankers to update them on changes in their correspondent banking network. Corporates understand regulations as they also have to comply with those that apply to them. Correspondent banks today are under tremendous scrutiny from regulators, and most corporates understand this.
“But corporates need to run their global business operations smoothly and efficiently, without disruption or unexpected change. They expect their bank to help them manage this, regardless of the shifts in the industry.”
HSBC’s Koutzen adds: “Clients are holding their banks accountable on their ability to deliver across the network. Picking a clearing counterparty is really important. Picking the wrong partner could mean not only letting the customers down but sacrificing the control standards. It is an important topic.”
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Dominic Broom, Bank of New York Mellon |
Not all corporate treasury teams are this hands-on, of course. Jean-François Mazure, co-director of cash clearing services at Société Générale, says for the most part, the primary concern of a corporate is that their payment is processed: “Choosing providers, reliability and long-term commitment are very important. The client wants to be able to send a payment and for it to be processed, they are not preoccupied by which bank is doing it.
“Reliability and long-term commitment have become really key decision factors when it comes to selecting a correspondent. The ultimate client, in our French network for instance, merely wants to send payments, easily and cost-effectively. In most cases, they are not preoccupied by the banks involved in the routing.”
Getting the money moving is not much of a problem as most banks, regardless of size, have access to the same network. Says Deutsche’s Skerritt: “The most important thing in the whole network is Swift. The movement of funds cross-border is seamless now, and at Deutsche Bank we see straight-through-processing rates of more than 97%.”
Overall, the way correspondent banking operates is changing. Clients are again looking to move into new territories, and it is up to the banks to decide if they want to follow them. Changes to sanctions mean that Iran and Cuba are re-opening their borders.
One banker says they are already starting to have companies ask questions about how they can do business in former no-go areas: “Some of our clients are seeing business opportunities in previously sanctioned locations and, as a result, they’re looking to open bank accounts in those countries.”
The same banker adds that some transactions have been completed, but they are not without their problems: “We’ve had situations of payments being sent to a correspondent bank and held up in the screening process. In one example, a company doing business in Cuba was sending payments from the US to Germany. However, the payment was stopped because the attached messaging included the word Havana. We clarified the situation with the various parties and the payment eventually went through.”
