Wholesale banking across the globe is experiencing great flux due to the increased sophistication of customer needs and the shifting of balance of power in favor of corporate clients. Regulatory intervention along with market forces are playing key roles in determining future trends, as globalisation unleashes its true power. The Asia Pacific payments business promises the highest growth rate (in double digits) with Chinese and Indian economies showing no signs of slowing down in the near future.
The developing economies (especially BRIC countries) that are the focus of the future tussle for market supremacy are characterised by a rigid technology infrastructure, which does not support standardised value added products to corporate clients. Mergers and acquisitions, organic expansion, and collaboration with local banks are some of the key strategies employed by multinational banking corporations. Each of these strategies has its own advantages and limitations.
The Value Proposition of Partnering
Being a client relationship driven business, it is quite understandable that multinational banks would want to create a strong relationship base of local banks through partnering. Partnering allows both the local bank and the multinational bank to be more customer-centric and provide their customers with a wider range of services.
Local banks also offer great value by virtue of acting as a bridge in managing cultural diversity, communication barriers, unique business acumen, and a specific set of regulations with respect to each country. In most closed or semi-closed economies, business transparency, corporate governance and compliance are critical aspects yet to be mastered by global corporations. Competent and well-entrenched local banks can prove to be the best bet for large banks in delivering much-cherished global integrated payment solutions to clients on such a wide international scale.
As banks globalise and spread operations in multiple geographies, the cost of establishing a proprietary network infrastructure and maintaining a web of interlinked applications with many access points becomes an incubus. Most attractive economies now have focused economic and financial centres where multinational corporations are encouraged to set up manufacturing or service setups. As such, the erstwhile practice of setting up representative branches in the capital city is no longer sufficient. Banks need to commit presence in more than one local hub to ensure a meaningful share of the business opportunity. Seamless integrated operations require interconnection between these local branches, which in turn implies tremendous outflows both for technology and for the trained resources to man them. Association with a local bank can provide savings in terms of this investment.
From a local bank perspective, partnering with multinational banking corporations offers value as well. Modern banking practices, sophisticated product development, advanced technology, superior risk management and compliance, well evolved branding and distribution concepts are some of direct benefits that a global bank bring to the table. In addition, there is yet another interesting benefit for both stakeholders in this partner-banking model. As World Trade Organization (WTO) guidelines are accepted across countries, the coming decades will witness the gradual opening up of economies, in particular the banking sector. Foreign banks that already have partner banks in place will be best suited to grab the market share. Local banks that were previously shielded by sovereign protectionist policies will feel the heat of competition and it is only those that have strong global bank back up that will flourish in the new market dynamics.
Euromoney’s annual survey last year (March 2006) on international cash management services predicted the decline of the specialist and the rise of the global provider in the payments business. The survey mentioned that there had been an increase of over 50% in the number of countries where global banks have full service partner banks. Within the Asia Pacific, Standard Chartered Bank has entered into collaboration with banks in China, Indonesia and South Korea; Citi has established partnerships with post office networks; and ABN AMRO has presence in the largest number of countries through partner banks.
Single currency multi-country cash pooling is a standard offering now with most banks equipped with enhanced partner bank coverage. Clients expect sweeping accounts as a part of the vanilla product solution. All this corroborates the notion that partner banking is well acknowledged and practiced as a potent strategic tool by multinational banking corporations to enhance their shareholder goals.
Challenges in Partnering
Partner banking is more of an evolutionary development across the globe. As with any such initiative, there has been explosive growth in various standards, procedures and agreements being used across partnerships. The absence of strong technology infrastructure only adds to the complexity of managing customer requirements across various local banks. Each partner bank will have its own strategic business sense and aligning it with operational tactics creates great challenges for product management, customer target segmentation, acceptance of standardized procedures and a seamless technology infrastructure backbone.
The presence of diverse legal requirements in each country poses a significant challenge to a globally integrated customer offering. Worldwide standard cash management products also call for the capability to interconnect with various clearing houses. Handling multiple message formats, reporting statuses and clearing processes should be ensured without compromising a global bank’s ability to process huge transaction volumes. From a technology perspective, application maintenance for multiple partner bank/clearing system connections can turn into an expensive proposition. Any far-reaching regulatory changes such as anti money laundering (AML), Sarbanes-Oxley (SOX) or the single euro payments area (SEPA) would be cumbersome to implement across all systems. It is here that an enterprise-wide approach either on a global or regional bias that would find the best value.
Mid-office architecture can prove to be useful in a harmonised infrastructure for partner banking across the globe. Its benefits include scalability, modularity, ability to handle multiple interfaces, central switch for product management, and low cost of maintenance. The mid office is the intervening layer between the customer facing front office channels and transaction posting local back offices. Worldwide the increasing trend is shifting most of the logic and intelligence from front and/or back office to mid-office to make it the controlling hub. Various partner bank connections can be set up from this interface to improve functionality. Let us look at the core components of a typical middle office that enables such a value proposition.
For any streamlined STP transaction-handling infrastructure, the content interpreter plays a critical role in being the single access point into which various global customer channels converge with their data feeds. Typical functionalities include the ability to interpret or read different messages coming in from different channels, updating/reporting acceptance of transactions into the mid-office suite, basic semantic checks and further connecting into the processing system. Various processes such as queue pickup, reading, files concatenation splitting, duplication checks, parsing, storage of payment messages, etc. combine to deliver the requisite capability.
The content/message processor comes into play once the contents have been logically interpreted and are ready for suitable action. Standard processing activities include generic and country specific validation checks, data enrichment and conversion to message, which can be construed by content identifiers of the local bank. (The latter also involves mapping to local characters and local language.) To ensure optimal system efficiency, the architecture needs to have an integrated generic data model (IGDM) structure with an intelligent processor to manage the message specific objectives.
The message router plays the most critical part in the mid office. Transactions from various partner bank channels converge into a message interpreter and are meant to be sent to various different back offices situated in multiple countries. This is taken care of by a routing mechanism wherein a unique identifier along with a set of other parameters is inputted into a setup algorithm. Pre-defined connections with specific queues as per international standards comprise this routing algorithm. The message can be tracked on a real-time basis by virtue of stored values for each identifier. It is imperative for the architecture to have a reasonable number of routing parameters to ensure scalability of the model.
Each back office has its own legacy system. Once the transaction is posted, the status update from the back office could be in proprietary format, which calls for conversion to format that can be logically interpreted by the mid office. These updates are then periodically sent across to the various partner banks through a client-reporting interface. In many cases, considering the cost of developing local bank specific interpreters, multinational banks require local banks to modify their systems to have mid-office acceptable reporting in place; the technology migration for local banks needless to say has to be generic.
The ability of a global bank to uphold high service standards to its partner banks lies in a timely and accurate processing capability. A key ingredient of this that the global bank is able to capture the various stages a transaction undergoes during the entire processing chain. Reporting, both in terms of content and frequency, could be either pre-defined as standard or customised as per specific partnership agreements. Global banks with a greater number of options for its local bank would obviously find an easy connect with the end customers. In cases of conversion from manual reporting to electronic reporting, cost savings are incurred that can be shared with the end customers.
The true value of the middle office concept lies in eliminating the need to have many-to-many connections between front-end channels and the back offices. This offers tremendous plug and play utility to a global bank as it expands with multiple partnerships spanning vast geographies across the globe. Legacy applications may no longer impede business imperatives and such IT infrastructure emerge more as an enabler. From a regulatory perspective, the mid office serves as a switch that can be configured to take care of changes in regulation compliance. Rich functionality with data enrichment can act as a potent differentiator in local markets. Mid-office as a harmonised payments processing hub can ensure that both the global bank and partner banks emerge as winners in their own rights.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.