In today’s volatile economic climate, corporates, who are under pressure to do more with less and largely remain cut off from bank-supplied credit lines, increasingly require fully-integrated and locally-offered cash and trade services for enhanced risk management and the optimum processing ability. As in-house development costs of such systems are high, many corporates are naturally turning to their local banks for assistance, only to find that they are often unable to help.
For many smaller banks, who are buckling under the strain of the escalating cost and burden of regulatory compliance, investment in such technology is simply out of the question. Fully automated and adaptable systems can require start-up costs that run to tens of millions of US dollars, with additional monthly development and maintenance costs in the region of US$300,000. This is just the beginning. Should the system need adapting or updating, which is a near-certainty given the speed of technological development, further costs would be incurred.
With this in mind, it comes as no surprise that many local banks are unable to rise to these demands. By extension, it should also come as no surprise that corporates may be forced to look elsewhere – namely to global banks – for help if their needs remain unmet by their domestic banks. This inability to keep up with technology demands means that local banks run the risk of losing even their most established clients to global banks that do possess the required banking platforms. As the ‘technology-gap’ between larger and smaller banks widens, and local banks fall further and further behind the global players in technology terms, this risk increases.
Bridging the Divide
Closing the gap is far easier said than done. Seemingly never-ending regulatory and harmonisation initiatives mean that banks must reconcile the challenge of increasing costs versus decreasing revenue streams, while keeping their clients happy. This is no mean feat.
Regulatory compliance, and all that it entails, is now a chief concern for banks, with matters having been brought to a head by the recent coming into play of the Payment Services Directive (PSD). While the PSD has been welcome news for corporate treasurers, it has done little to help banks. Its stringent rules mean that banks are no longer being able to supplement their income with the interest payments on transaction fees. This has turned payments processing into a loss-leading line of business that cannot be abandoned, not least for reputational reasons, .
Of course, the list of rules and regulations is being added to all the time. The Basel II accord means that banks must demonstrate greater control and knowledge, which requires more staff, new software and upgraded platforms, and therefore comes at considerable cost. This is soon to be followed by Basel III, which will require banks to raise their core capital ratios and which could also result in higher capital adequacy requirements being applied to trade finance transactions; thereby resulting in yet more costs and greater restrictions.
All of this leaves banks in a difficult position. The continuing burden of regulation, which cannot be ignored, combined with growing pressure from corporate clients that should be prioritised if banks are to remain competitive, means that very little is working in their favour. As a result, the threat of losing corporate business to international banks and/or non-bank payment providers that are not bound by such strict regulations is very real.
Whereas outsourcing cash and trade services to a specialist provider would once have been the obvious, and perhaps most appropriate, solution for smaller banks struggling with cost and technology concerns, it is now far from ideal for several reasons.
Firstly, outsourcing in the conventional cost- and product-driven sense does local banks a great disservice, as it fails to recognise the value of local market knowledge and reflect that local banks have a crucial role to play in the modern working capital cycle. Secondly, the lack of flexibility of most outsourcing offerings is also an issue, as it can leave local banks unable to provide a market-specific service or compete with international banks operating in their domestic markets. Thirdly, the competitor-risk inherent in traditional outsourcing arrangements is not to be taken lightly. Regardless of the contractual agreement between the two parties, there is always the danger that the smaller bank will, at some stage, lose business to the larger provider. Obviously, this additional risk concern is the last thing that local banks need at present.
However, the disadvantages of outsourcing do not mean that local-global bank partnerships should be abandoned entirely. In fact, as we move forward, local-global alliances make sense. Local banks need access to global-standard compliant and internationally reaching technology with minimum cost and time-to-market in order to meet corporate demands, and global banks stand to benefit from enhanced local market presence and knowledge.
A New Take on Partnership
A potential solution for optimum local-global bank relationships is a more collaborative approach to the traditional outsourcing model that seeks to use global-standard technology to leverage and enhance local knowledge, rather than merely alleviate cost concerns. This ‘manufacturer-distributor’ model is based on the concept of local delivery of wholesale banking solutions and aims to address concerns such as the lack of liquidity being suffered by local banks, which in recent years has been a major cause of concern for local commerce.
Under this model, ‘manufacturers’ are banks that have transaction banking – encompassing cash and working capital management, trade finance and payments processing – as a core business offering. ‘Distributors’, for their part, are those banks that have a sound knowledge and understanding of their domestic markets and strong relationships with local corporates, and who are therefore best placed to offer these services locally.
The benefits of this combined approach stem from its focus on the individual core strengths and capabilities of both local and global banks. Local banks have the necessary client relationships, local expertise and risk management and assessment capabilities, while international banks are better positioned to provide the global reach and infrastructure.
It is hoped that this combination could result in local dynamism, understanding and commitment, tied into a global range and standard of working capital technology, with international reach. In short, this is exactly the sort of leverage local banks need to keep pace with the increasing demands of their corporate clients, for greater international reach and processing efficiency, while retaining core competencies and generating cost efficiencies. Indeed, collaboration of this nature could allow local banks to capture global flows and expand their existing business, by penetrating hitherto inaccessible corporates and aiding smooth entry into international markets for new and existing corporate clients looking to expand.
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.
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