Transaction services: JPMorgan exec aims for top league-table spot

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By:
Graham Bippart
Published on:

JPM wants to become the top transaction bank in the world – Takis Georgakopoulos, global head of treasury services, tells Euromoney how the bank will do it.

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Takis Georgakopoulos, global head of treasury services at JPMorgan

Some eight years since JPMorgan decided to compete with the likes of Citi and HSBC in the global transaction banking business, it is getting closer to its goal of taking the top spot in the league tables.

While it still lags in certain sectors and geographies – trade finance and Asia-Pacific, specifically – the bank has made some big strides. Soon, it may give the traditional heavyweights a serious challenge for the title.

Transaction services is not the sexiest segment of banking, but in recent years has nonetheless become a sought-after business.

Even Goldman is courting cash management – though, to be fair, it seems the bank wants to be the kind of universal bank it traditionally spurned, having taken up even retail operations, meaning it can hardly stay away from cash management.

Overall revenues in transaction banking took a beating in 2014 and fell further into 2016, but it has since revived, and in 2018 total revenue of the big players hit an eight-year high, according to Coalition.

Transaction banking has therefore been a steady profit generator at a time when investment banking revenue streams, such as capital markets origination and trading, have been volatile.

While lending growth slows in the US, as third-quarter reporting showed, and revenues in trading and investment banking fluctuate, transaction services has been steadily posting double-digit growth for the top players in recent years.


The pace with which we’re able to scale is evident in the numbers. We’re firing on all cylinders 
 - Sungmahn Seo, JPMorgan

At JPM, which has been tied with HSBC for the number two league table spot globally in transaction banking since Coalition started league tables in the sector in 2016, treasury services – the only part of transaction banking it segments out in reporting – was up 15% year over year in 2017.

This year, it is well on its way to beating last year’s $4.2 billion annual revenue figure. The bank has reported $3.5 billion in the first three quarters of 2018. It has seen positive revenue growth on a quarterly basis for two years.

The results aren’t directly comparable with Citi and HSBC, but revenue growth in their transaction banking units, as they report it, has been slower, suggesting JPMorgan may have an honest shot at contending for the lead, despite its relative weakness to Citi and HSBC in some areas.

Until recently, EMEA was one of those relative weaknesses. As a US powerhouse, it is natural that JPMorgan would have upped its game in the US first, where it jumped into the top three overall in 2016, according to Coalition. In the first half of 2018, it entered the top-three tier in EMEA.

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Sungmahn Seo,
JPMorgan

Sungmahn Seo, managing director and head of EMEA payments and FX at JPM, says that by focusing on building a global set of products before building out some local capabilities, the bank took a little longer than competitors to gain traction in some areas.

“But we ended up with a much more powerful and scalable solution,” he says. “The pace with which we’re able to scale is evident in the numbers. We’re firing on all cylinders.”

Coalition’s league table for fiscal year 2017 supports that view. JPMorgan was one of the two strongest performers year over year in Apac, EMEA and the Americas. It was also one of the two strongest performers in cash management.

“With the continued growth of cross-border flows, global supply chains, multinationals from China and the overall world economy, there’s a secular trend toward growth in transaction services,” says Takis Georgakopoulos, global head of treasury services at JPMorgan.

Deloitte projected further progress in 2018 on steady growth in the sector in previous years, reflecting global economic growth. That has promoted a boom in small and medium-sized enterprises doing cross-border trading.

“It’s not just a large pie that’s growing; there’s also more potential for consolidation, as more and more companies are going global, and local banks can’t provide the level of services or security they need,” Georgakopoulos says.


The cost of maintaining the single platform will be about 50% lower than legacy platforms we used to have, enabling us to deliver services to our clients at the lowest marginal costs 
 - Takis Georgakopoulos, JPMorgan

So, the first step in creating a global, leading transaction bank is unifying platforms.

However, historically, big banks’ transaction banking platforms have been a mishmash of various regional operations. JPMorgan was no exception, adds Georgakopoulos.

“Global banks have fragmented transaction services architectures – it’s just an accident of history,” he says. “You would build a separate platform for each new market.

“But it’s incredibly expensive to maintain, and every time you make changes to your systems, they have to be replicated across each country. So a couple of years ago we started moving to one global payments platform, and one data lake for all customers.”

In 2017, the bank migrated its platforms in China, Mexico and Switzerland to its revamped global platform. Next year, it plans to complete the migration of its European operations, with an eye to finishing by the end of 2019 or early 2020.

At that point, JPMorgan’s global treasury services operations will offer one engine for reporting, entitlement, calculation and more, so that an input in one country is replicated globally.

“Our aspiration is for our clients to be able to have a billion virtual accounts if they need them,” says Georgakopoulos. “We don’t believe anyone else can host that kind of capacity. As far as I know, no one other bank has a single, scalable and global payments platform.”

Reducing costs

Cost reduction is key to competitiveness in transaction banking, as it is far from one of the more resource-light business segments of banking, and non-banks have presented an increasing threat to bank competitiveness.

Georgakopoulos says the new, global platform will take a chunk out of treasury services costs, adding: “The cost of maintaining the single platform will be about 50% lower than legacy platforms we used to have, enabling us to deliver services to our clients at the lowest marginal costs.”

The growth in international payments also means a growing variety of country and region-specific regulations, including anti-money laundering and know-your-customer (KYC) requirements.

In response to that, the bank launched its distributed ledger-powered interbank information network (IIN), to which 75 banks signed on by late September. IIN helps correspondent banks cut down on the time they spend on compliance and other data-related enquiries that can hold up payments for, sometimes, days.

It does that by allowing banks to store clients’ information on the securely encrypted portal, which can then be accessed by other banks on the network that may need it to, say, find missing KYC information.

“In the past, you had to do sanctions screenings tests manually,” says Georgakopoulos. “So, you’d stop a transaction, and then go to each bank involved in the chain of transactions. Now we connect banks through [IIN], so we’re able to access that information immediately.

“Once you have that information, you can keep it on the platform for other information exchange uses.”

Regulation

It may seem like minor innovation, but in a world where fantasies about blockchain use abound, securely encrypting client info that can be used to safely speed up a range of banking activities has practical, notable implications for cutting costs, as well as for avoiding regulatory breaches – the latter all-important as the rate of regulatory change globally remains high.

To this end, the components comprising JPM’s global payments platform are “built around a sufficient level of generalization, so that they can support legal and regulatory requirements around the world,” Georgakopoulos says.

“Our global payments platform is built in a highly modular and scalable way that it offers the flexibility for customization to support local countries’ legal and regulatory requirements around the world.”

He adds: “API is one way for customization, and we offer many other connectivity or adjustment options such as adapters, widgets, integration with ERP [enterprise resource planning] systems and embedded solutions.”

Fraud protection is also key as the volume and number of transactions increases. Data from the Association for Financial Professionals show that after an abatement of payment fraud from 2009 to 2013, it has been on a rapid increase since: involving 60% of respondents in 2013 and rising to 78% in 2017.

Georgakopoulos points to JPM’s global payments guardian as part of its response to that threat. The system incorporates machine learning to enhance client-specific parameters, like ‘our CFO never approves transactions’, and allows the clients to dictate the ‘level of confidence’ they want to have for any given transaction.

Due to machine learning, Georgakopoulos says “the level of accuracy we get out of it is extremely high – much higher than the past – even accounting for the fact that the level of attacks [or fraudulent transactions] have gotten much more sophisticated over time”.

Backlash

All this talk of growing international trade has its counterpart, of course, in the growing backlash against globalization, which could take some of the wind out of global trade and payments.

After a solid run of growth for years, it may be challenging to keep momentum up in some segments of transaction banking.

Cash management might be an exception, as corporate customers will need their banks to help them navigate the ever-choppier seas of global trade.

Brexit is one obvious threat, to which JPMorgan has a seemingly simple solution. The bank will smooth over the cash-management process for clients affected by Brexit by offering the same set of treasury products out of its continental and Irish operations as it traditionally has in London.

It will also lengthen the dollar cut-off times for same-day payments to 10pm London time, whereas most banks offer it until 4pm or 5pm.

And cash management has seen much steadier growth than trade finance, where margin compression is forcing revenues down in traditional trade – overall revenues increased only marginally in the first half this year, after five years of decline, Coalition data show.

That may explain why JPMorgan doesn’t appear to be making an aggressive push to improve its ranking there. Coalition ranks JPM’s trade finance business between seventh and 10th.

So, the focus on cash management and payments, where volumes are growing significantly, seems like the right move.