The rise of UBS to the top of Euromoney’s foreign exchange market share ranking this year proves how ill advised it is for any bank to declare itself the master of any financial market. Even in those sectors where a handful of banks appear to have achieved unassailable pre-eminence, newcomers can always break in. Seats at the top table are never reserved in perpetuity.
In 2001, according to calculations based on responses from 659 large institutional customers, the top six banks between them commanded a 41.5% share of the foreign exchange market.
UBS Warburg wasn’t one of them.
It lay in seventh position with a market share of just 3.55% compared with market leader Citigroup’s 9.74%. Two years later it has hit the top spot with a market share of 11.5%. This is based on replies from 1,901 customers responsible for $17.1 trillion in annual forex business. (We would ask the critics of our poll – bankers just hate being measured – to show us a more robust one.)
How has UBS done this? And what broad lessons can the industry draw?
Three things stand out. First, senior management at UBS made a clear assessment of the costs and benefits of competing in the forex market three years ago, contemplating a complete withdrawal, pursuing a niche strategy or pushing for a top-three spot. Having decided on the latter course it pursued it with clear determination. This has paid off remarkably quickly.
Second, it invested heavily and well in new technology that has transformed the foreign exchange market. It has paid its staff to bring volume online, driven down costs and used electronic distribution to compensate for the lack of a global branch network to compare with Citigroup’s.
Third, it was early in identifying and pursuing with vigour a key emerging customer base: other banks. Non-market-making banks accounted for 6% of votes in our poll in 2001, 14.5% in 2002 and 18.6% this year.
This highlights the changing relationship between banks – in selected markets – from outright competitors to cooperating wholesale producers on the one side and retail distributors on the other. UBS builds the forex processing machine, a host of regional banks direct their own customers onto it. They get good execution. And their volume helps pay for the technology that provides it and frees smaller banks from having to build their own.
Investment managers and retail banks do much the same thing by distributing investment products – such as, say, capital guaranteed notes or reverse convertibles – that are structured by the wholesale derivatives firms. The big banks can pump out these products all day long but can’t afford the sales networks to reach those end customers with them.
Historically, banks have been much more reluctant than competitors in other industries to outsource or share core technology. (Think airlines and ticketing, for example.)
But there are many business segments where banks are stuck on a treadmill of huge technology investment just to stay in the game and where customers are annoyed at having to hook themselves into many systems. All manner of treasury products fall into this category, including the most fundamental of banking services: payments and cash management.
If UBS and others can do this with forex, the only barrier to smaller banks accepting similar arrangements for fixed income, equities and derivatives is psychological. Indeed it needn’t just be small banks using such services: large commercial banks might wish to outsource many of them. The trick is to do so without losing customers outright.
Banks are scared of mergers right now because so many have been disastrous. In future, virtual mergers – where one lead bank consolidates flows from many others in a specific market – may fundamentally transform the business.
In the meantime, some banks still don’t get it. Senior managers at the leading forex banks will tell you that no upstart could break into the top ranks now, even when it just happened before their very eyes.
