Challenger banks and RMB to shape year ahead
The continued internationalization of China’s currency and the emergence of challenger banks is set to define transaction banking in 2015.
Last year was a time of change for transaction banking, defined by the arrival of new payment, compliance and technology systems as well as regulations.
There is a lot of discussion around the challenger banks
Now these long-standing challenges have come into effect, transaction bankers are back eyeing competitors' strategies and shifts in market dynamics across various geographies. The year ahead might not visibly shake up the landscape, but slow-burning changes could start to make their impact.
The emergence of the challenger banks is not unique to 2015, but this year will see them burnish their competitive credentials.
Peter Jameson, co-head of product management and head of trade, GTS EMEA, at Bank of America Merrill Lynch, says: “There is a lot of discussion around the challenger banks. We are seeing an emergence of new payment service providers such as the large technology companies who are exploring banking licences. This still has a long way to go and to play out.”
Although the rumours of the likes of Facebook entering the payments market has received widespread attention, banks with branches on the high street represent more immediate threats.
While these institutions are initially focused on consumer banking facilities, a clutch of challengers are moving into transactions.
Metro Bank established a presence in SME banking in 2013 after acquiring invoice discounting and factoring specialist SME invoice finance, enabling it to offer invoice and asset financing to business clients.
And 2014 saw UK-based Shawbrook Bank launch Shawbrook business credit, offering facility limits of up to £25 million to boost lending to the country's SMEs. The newly launched Tungsten Bank, established by e-invoicing provider Tungsten Corporation after the acquisition of FIBI Bank last year, is looking to capture a greater share of supply chain finance.
The challengers might only be taking baby steps but collectively they have the potential to grab market share in lower value supply chain finance transactions, exert margin pressure across the industry, and establish a new client base overlooked by the incumbents.
While existing players would no doubt like to see new players subject to onerous regulation to even the playing field, they accept challenger banks are here to stay.
Diane Reyes, global head of payments cash management, HSBC, says: “While the regulation of these firms is also increasing, providing challenges to some business models, we expect the challenge from new entrants to increase over the coming months and years. It is imperative that we continue to innovate to ensure we continue to meet our customers’ needs.”
In any case, the pie in transaction banking is growing. The year ahead could also prove pivotal for the Chinese economy, particularly around the continued development of the renminbi as an international currency.
The country continues to liberalize and 2014 saw the rapid emergence of cross-border sweeping capabilities from the global banks after the creation of the Shanghai free-trade zone (SFTZ). China is planning to establish three further zones located in Guangdong, Tianjin and Fujian, as well as increasing the size of the SFTZ.
Diane Reyes, at HSBC
Daniel Scanlan, regional head, transaction banking, Americas, at Standard Chartered, says: “It is exciting to see what will happen in China, and around the internationalization of the RMB. China is starting to loosen the reins around the currency, and the question now is how fast this will happen.” This feeling of optimism towards China comes despite the wider concerns that the country’s economy is slowing. Its central bank is predicting growth of 7.1% this year, a decline on the 7.4% seen in 2014.
However, as Reyes notes, HSBC expects the country’s GDP to increase by 7.7% in 2015, while only forecasting global growth of 2.8% in the same time frame. Strict limits and quotas are in place on those operating in the SFTZ, although plans are afoot to ease overseas investments.
She says the increased liberalization by the authorities, during the past 18 months in particular, has enabled more corporates to include their Chinese liquidity into their global pools by using automated cross-border sweeps. Reyes adds: “The bottom line is that the RMB can offer a range of advantages to companies doing business in or with China.”
Even if 2015 sees Chinese growth disappoint, FX liberalization will continue to expand transaction banking business opportunities.
“The continued internationalization of the RMB supports the growth of trade with China, and is therefore a potential driver for China’s growth,” concludes Standard Chartered's Scanlan.