Views expressed by a range of senior treasury services experts at a recent roundtable hosted by BNY Mellon in Frankfurt suggest that the key to future success, in an ongoing challenging environment, is combination of local banking ethics and global banking capabilities.
Credit constraints have been a harsh reality in the global business environment for over a year, and German financial institutions (FIs) have not been immune. As a result, the bank/corporate dynamic has dramatically shifted. Many corporates – both in Germany and other developed markets – led a flight to quality in their (re)selection of financial service providers, and the most resilient relationships proved to be those that were equally highly valued by both the corporate client and the FI in question. Meanwhile, partnerships that were opportunistic or purely price/revenue-driven in nature were frequently the first to be reviewed – mostly negatively.
This has led to a renewed focus on the importance of close relationship banking and the benefits this brings – both in terms of local market insight and risk-mitigation.
The Importance of Relationships
Relationship banking, even relative to a fundamentally transaction-driven business, is widely considered to be the way of the future.
“If we are truly honest, bankers were used to a bank-centric world, and this is over,” said Markus Wohlgeschaffen, head of global trade finance and services at UniCredit Group, at the roundtable. “The customer is now at the centre, and this means that irrespective of whether the relationship manager is a cost centre or a profit centre, banks should understand that all is about the relationship manager. He or she detects the needs of a customer and in turn has to be served and seconded by product specialists.”
Ingrid Weißkopf, product manager at Commerzbank, expressed a similar view: “It must be remembered that there are various groups of clients with varying needs,” she said. “The interests of all of these individual clients must be understood and distinguished. While it would be in some way idealistic to expect one bank to be able to concentrate equally on all the various groups, there is a lot of room for expansion in terms of partnerships between the banks. This would allow for an even greater client focus.”
The focus on the role relationships play in financial services also highlights the increased importance and developing nature of risk management. Certainly, the end of the era of cheap liquidity has brought the need for a true understanding of the counterparty sharply into focus.
Technology and Transaction Banking
Are strong bank-client and even bank-bank partnerships enough? Aside from relationship banking, there is also a growing recognition of the importance of holistic solutions, including those linked to working capital optimisation. This approach complements the existing developments in open account and supply chain finance.
The next step, therefore, is to combine the knowledge gleaned from enhanced relationships with the growing expertise in the global transaction chain. This new model needs to be driven by local understanding, rather than a globalised business view. The union of the two can be used to create best practice and optimum service provision for the customer – as well as secure Germany’s position as a leading innovator in the field of transaction banking.
So transaction banking is once again in vogue. Its conservative risk profile once meant that it was pushed aside by the more exotic areas of banking, but that very profile has now – accompanied with its sustainable annuity revenue streams – put transaction banking back in favour.
“Transaction banking is sexy again,” said Michael Molliné, senior vice president at LBBW. “Why? Easy – it’s risk-averse. Five or 10 years ago, nobody was interested in transaction banking. With ROE’s of 10% – at best – how could it compete with other banking areas with ROE’s of 25%, 30%, 40%?”
How the tables have turned. While certain lines of business struggle to regain a solid footing, the products and solutions associated with transaction banking have been resilient and dependable, for both banks and for their client base, throughout the worst part of the global crisis.
As a result, transaction banking – by its very nature – is pivotal to the concept of nachhaltigkeit (sustainability), which is now very much in favour in Germany. However, as we move forward, the transaction banking model itself needs to evolve from the narrow definition of outsourcing.
The traditional, cost and product-driven outsourcing models need to be replaced by a client-centric collaborative model that combines the strengths of global institutions with the best attributes of local banks and financial firms. The collaborative model is, in effect, the best of both worlds, as it ties local dynamism and reliance, as well as understanding and commitment, into the bigger world and the broader range of working capital capabilities.
Ultimately, the notions of collaboration and partnership merit focus as a way of effectively serving financial services and transaction banking clients in a manner that is responsive, appropriately risk-mitigated and innovative. In order to do this, the emphasis must be placed on the needs – present and future – of the client.
Moving Forward Together
Smarter local and international bankers have internalised the impact of the global crisis, both on their (financial) sector and on the business of their commercial and corporate clients. An important outcome of the global crisis has been, and continues to be, a motivation to innovate, as well as a motivation for banks to reinforce and evolve their value proposition in support of their business clients.
Financial service providers – whose executives appreciate the changing business landscape – understand the importance of strong relationships and the opportunities inherent in collaborative partnerships.
“What we are looking at, I think, is a focus on the core strengths and capabilities of individual banks – both local and global,” said Axel Miller, principal at international management consulting firm Oliver Wyman. “If that happens it will likely result in a multi-layered structure. The local banks will have the client relationships, local expertise and risk management capabilities to detect real demand, and the international banks will be better positioned to provide the global infrastructure and at scale product capabilities. In a collaborative model this in turn results in global banks benefiting from local market insight, and local banks having access to high-volume, multi-product processing capabilities with global reach.”
Future partnerships put clients and solutions first, and a regional ‘closer-to-client’ model is an effective way for banks to work together to provide corporate clients with timely and appropriate services, both now and in the future.
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.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?