Fundtech’s executive vice president (EVP), Sanjay Dalmia, and global head of sales, Chris Zingo, see a multitude of opportunities across the global financial supply chain, especially for firms that think out of the box.
While complex regulations are a key issue for FIs and require increased spending, Dalmia believes they also create a level playing field. Regional banks especially have new opportunities; one banker even observed that the Basel IIII capital adequacy regime appears to be against globalisation, with the result that global banking could change significantly as large global banks are being penalised by the need to hold more capital.
Dalmia sees five additional emerging opportunities for FIs:
- New trade routes have emerged, including east-to-west and intra-Asia as well as in narrower corridors such as China-Africa.
- There is more investment into emerging markets.
- The number of Asian companies amongst the Fortune 500, top 500 banks or other top companies has grown. These Asian corporates don’t have the same needs as western companies, as they look at risk and consolidating capital differently. There is an opportunity to service their specific needs.
- Processes and systems that previously took companies 10 years to put in place can now be put in place in two years, so implementation of new solutions is faster.
- The renminbi (RMB), with 47 countries already using the currency to settle trade and more investments as well as RMB reserves. More are expected as it opens up.
According to Dalmia, the big change in retail payments is an increase in direct debit and debit card payments, and key success factors include security, mobile, social media and resilience. Changes such as linking the mobile number to the account number, as is done in the UK for the Faster Payments scheme, as well as speeding up payment and providing a better user experience, could result in tremendous growth. Large FIs have good opportunities, he said, quoting DBS Bank’s managing director Sandeep Lal who has commented that people will try out new providers for micropayments but want large and reliable payment providers for higher value.
In corporate payments, mobile is not yet there and factors such as scalability are more important. A key issue is integration to make transactions more frictionless, since the average payment is currently converted seven times from enterprise resource planning (ERP) initiation through final interbank clearing. Success factors for FIs include being easy to conduct business electronically, being connected via electronic data interchange (EDI) and supporting various payment methods.
Zingo sees three drivers of change in transaction banking – increased demand for new products, renewed focus on revenues, and how FIs generate revenue. To manage these changes, banks are expanding their capabilities across the supply chain by automating it and moving from silo product lines to horizontal operational layers. Regulation that is portfolio invariant means that strategy has to take into consideration who the firm wants to be, and also how to service the market.
Expansion across Borders – Regionalisation Strategies
DBS managing director Navinder Duggal and Geoffrey Armstrong from ANZ shared their key learnings from their banks’ expansion across borders.
According to Duggal, the main reason DBS wants to expand outside Singapore is to follow its customers as they move into China, Hong Kong, India and other markets in Asia. While other regions are interesting, DBS doesn’t have a competitive advantage so the bank wants to stay focused on Asia.
The initial growth will come from lending; growth has been predicated on the bank’s strong balance sheet and liquidity position. “As long as we are able to generate deposits,” he said, “we will be able to grow.” The challenge, of course, is that growing in a new market requires investments in infrastructure, technology and people that have to be sustained for the long term. The keys are a clear strategy, choosing the right markets, leveraging existing infrastructure and strong leadership.
Armstrong said that ANZ developed a super-regional strategy and restructured the organisation. The strategy for the region is now the strategy for the bank, with transaction banking as a single business across the globe.
Key to the expansion was infrastructure support and ANZ standardised its system while ensuring that the one system could be adopted for the different variations per country. When developing the new system, the first step was a decision to build a single capability. Once that capability was defined, the second part was how to adapt the product offering to competition and local markets, and the final stage was to operationalise it.
Armstrong sees four areas as essential. The first is channels, which need to provide a consistent capability and product set that the bank can see across the region and that customers can operate with local capability. The second is a core product offering, and ANZ uses a single product offering across the region, albeit with customisation. The third is payments execution capability. Finally, the bank must have clearing capabilities that support customisation for each clearing region.
Payments Trends and a Look to the Future
BCS Information Systems managing director, Ricky Lim, and Fundtech senior vice president (SVP), David Brown, shared details of what they see as key trends in payments.
Lim sees three key trends. First, immediate retail payments will increasingly be part of our lives and a number of major financial centres have started to put real-time payments in place. The UK introduced its Faster Payments scheme in 2008, for example, and Japan’s Zengin system is near-real time. Singapore will launch a real-time low-value payments system next year, and Australia, Hong Kong and even the US are considering real-time payments. Real-time payments support the trend towards online or mobile shopping for consumers, help accelerate domestic and intra-region payments, and improve productivity and cost-efficiency as check and cash usage decreases.
The second is regionalised payment capabilities, as banks expand outside their home markets. Since transaction banking faces new competitors, compressed pricing, products that are not dissimilar and more demanding customers, bankers need to differentiate, innovate, collaborate and find new ways of doing business. Commercial banks are looking at payment hubs to support corporate regionalisation, particularly for cash management.
The third trend is the increasing regime of regulatory compliance. The 30-40% of capital expenditures (capex) that banks devote to regulatory compliance takes away capital to invest in new markets, so banks need to make sure they have the right infrastructure to deliver compliance.
From a technology perspective, Brown reported that banks are asking for software to perform multiple functions rather than having a single purpose, as they want it to support activities including automated clearing house (ACH) files for clearing or collections, high-value cross-border payments, immediate payments, and automated teller machine (ATM) and card switching. For mass payments such as payroll, banks now need the capability to process complex files so that clients can perform tasks like making payments to multiple parties in multiple countries while still taking advantage of lump-sum FX rates.
Another trend is removing payment functionality from front-end channels by having the software service all transactions as if they are part of the same channel, so that mobile, internet, cash management, tablets and other channels all offer the same experience, even across different regions.
Regulatory requirements keep coming up and some banks report that they spend up to 90% of their capex on compliance, which takes away from them being more innovative and developing new products. Brown believes banks need to re-think how they conduct their businesses.
Based on his conversations with clients, Fundtech chief executive (CEO), Ed Ho, reports that banks are focused on four areas:
- Shifting from risk-based income to interest and fee-based income.
- Working towards efficiency and lower cost of ownership for technology to increase earnings per share (EPS).
- Working to reduce operational and transaction costs.
- Risk management and regulatory compliance.
One of the key market drivers in transaction banking is regulation and there has been a surge of new rules to increase transparency and risk management. Celent estimates the annual cost for Basel compliance has risen from US$5m-10m for Basel I in 1998 to US$250m-300m per institution now for Basel III.
The conference provided valuable insights on both trends in Asia as well as how FIs or corporates can take advantage of the opportunities they present. As the conference continues into Day Two on 21 November with speakers on liquidity, RMB and immediate payments, gtnews will continue to report on the insights that enable firms to gain a competitive advantage.
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