SWIFT global head of corporate and supply chain markets, Andre Casterman, gave the opening address at Day Three of Sibos and led off the discussion by describing SWIFT for corporates. The identified the four pillars that the messaging provider focuses on as secure financial connectivity for treasury and payments; enabling banks to deliver innovation to clients over any channel; the 3SKey for identity, and supply chain efficiency.
Standard Chartered Bank managing director Jiten Arora then examined the themes of accelerating innovation in treasury and trade, and how corporates are operating within this environment. Arora sees four drivers of change. First, the Gulf Finance Corporation (GFC) was the catalyst for moving from west to east, especially as corporates looked to identify new sources of revenue. Second, with domestic markets in developed markets saturated, corporates started going to Asia to look for growth. Third, the role of the treasurers has changed, as they move from utility providers to decision makers. And finally, the role of emerging markets is growing rapidly.
In dealing with these shifts, Arora said, corporates are focusing on four areas. One is operational efficiency, where the ultimate goal is moving to in-house banks (IHBs) and payment factories. Another is enhancing working capital management, where corporates are focused on shortening the working capital cycle. The third is risk management, where corporates have to deal with new counterparties in new markets, new regulations, sovereign risk and new currencies. And finally, corporates are working to leverage innovations such as mobile commerce or the Bank Payment Obligation (BPO) so they can expand their reach and increase efficiency.
Payments and Trade in the Middle East and Africa (MEA)
Given the location of SIBOS in Dubai, the opening panel discussion explored the trade and cross-border payments needs of regional corporates.
Initiating the session, McKinsey director Hans-Martin Stockmeier outlined key themes in trade in the region. The Middle East and Africa (MEA) is a profitable part of the world, he said, and 45% of the banking revenue pool of US$100bn-$110bn in MEA is related to transaction banking. MEA trade flows with all parts of the world are growing, with the 16% annual growth in the Middle East-to-Asia corridor representing the fastest-growing area and with intra-regional trade expected to grow 18% to 20% per year. In a region with such good growth prospects, competition is increasing and there is growing sophistication.
Abu Dhabi Commercial Bank’s head of transaction banking, Murali Subramanian, said that natural resources are a focal point for trade in the region, and remittances also offer a good opportunity. While commodities flow to every part of the world, there is a trend in regionalising those flows. It is important to note, he said, that SMEs account for between 40% and 80% of the total economy in the region’s individual countries.
ECOBANK’s group head of transaction services, Patrick Gutmann, sees two areas as especially important. First, there is a heightened degree of political will to drive regional integration, with one example being the single central bank in francophone West Africa. Second, there are continuing technological developments to reach out to small and medium-sized enterprises (SMEs).
Subramanian said that innovation in the region has tended to focus on infrastructure for access to banking services. While mobile technology is important, there also needs to be a better credit evaluation infrastructure that offers opportunities such as non-traditional assessment of SMEs, including entrepreneurial drive and supply chain data – rather than just how well capitalised they are.
Gutmann noted that banking in the region has consisted of fairly traditional deposit taking and lending, because banks are risk-averse. As technology, and mobile in particular, evolve, changes are underway. He expects services to expand and that information for better credit decisions will become more available.
Innotribe Startup Challenge
SWIFT’s Innotribe turned, on Day 3 of Sibos, to looking at disruptive innovations in financial services as 15 finalists in the Innotribe Startup Challenge Grand Finale (selected from a total of 175 applicants this year) pitched their services in a quest to win the Challenge prize.
Finalists ranged from social remittance network Azimo and real estate crowd-funding Realty Mogul to emerging market credit scoring company Entrepreneurial Finance Lab and geo-location fraud prevention firm XYverify.
The Dynamics of New Trade Flows
McKinsey director Chris Ip kicked off this session by sharing the three key findings from
‘Putting Growth Back on the Banking Agenda’
, a report launched on Day Three. The first trend is the continued growth in international trade, with exports expected to extend their steady upward trend from 20% of gross domestic product (GDP) in 1990 to 32% this year and 35% of GDP by 2020.
Second, intra-Europe (US$4.5 trillion) and intra-Asia (US$3 trillion) trade remain the two largest trading blocks, followed by Asia-into-North America and Asia-into-Europe. Growth shows the reverse order, however, as intra-Asia trade is expanding more quickly and is likely to overtake intra-Europe trade by 2016. And third, the importance of commodities has grown and they now account for 15% of global trade, up from 10% five years ago. Eighty percent of commodity trade is oil and gas, followed by agriculture and mining.
Santander global head of trade finance and asset mobilization, Alberto Amo, said that the 2008 financial crisis convinced SMEs to start looking for new customers outside their natural markets. Banks have also shifted thinking about where they should operate and are venturing into markets where they didn’t previously have a major presence, which requires a change in mindset.
Turning to the Middle East and North Africa in particular, HSBC regional head of trade and receivables finance Tim Evans told participants that the region’s fortunes have bounced back, particularly those of Dubai. Whereas infrastructure development has focused on residential and trophy projects before, the composition has changed to civil, social and energy infrastructure. Increasing trade, infrastructure spending and the demographic shifts of a rapidly rising population underpin the growth. There have been benefits from the Arab Spring, Evans said, with billions of dollars allocated to infrastructure projects for hospitals, schools, transport and electricity generation as governments realise they will need to reinvest in the economy.
Providing a corporate perspective, president of treasury management at Chinese technology multinational Huawei, Evan Bai, said growth at the group is continuing and trade financing is essential for supporting it, although a more structured set of products would be beneficial. Ip chimed in to add that standards are indeed a key for the engine behind world trade. Huawei has long-term strategic relationships with banks in each of the countries where it operates, though it also uses its own risk control practices to check short-term to long-term liquidity and foreign exchange (FX) risk.
Security and Mandate Management
Faced with increasing security concerns and risks of internal fraud as well as external, corporates and banks are looking for ways to enhance controls. Panelists discussed how the SWIFT 3SKey digital identity solution, first launched three years ago, may meet the need for security.
SWIFT market manager for corporates and supply chain, Christopher Albers, described the increasing concerns and risks in corporate security, as well as new market requirements to strengthen it. At many corporates, however, there is no uniform process, with approval cycles and internal fraud mitigation practices varying and fragmented security.
He offered the example of Singapore Airlines, which lost US$35m due to internal fraud with classic characteristics, including a trusted employee – the fraud being detected by coincidence, with no structured process to mitigate losses and loopholes in the system. Another example is a US bank that lost a case for identity fraud because it was not securing the identity of its customers sufficiently.
Albers noted that there is an important variance between file (documentation) and online channels. The use of personal identity devices to log on to online banking contrasts with the authorisation carried out at the entity level rather than individual controls for file channels. SWIFT developed the 3SKey to help banks offer an interoperable digital identity solution, which can enable users to use a single key with all their banks. It enables single sign-on, personal approvals, control of user entitlements and account management.
Deutsche Bank managing director David Watson said its feedback from clients was that the processes today lead to a painful process of working around security tokens. 3Skey adoption pulls together relationships and gives banks an opportunity to enhance security, control and a safe digital identity with a single token.
Citi managing director JP Jolly concurred, adding that clients are looking for seamless, trusted, verified connections to their banks and simpler relationships. 3SKey, he said, enables them to log in with any bank and gives a high assurance of authentication.
One challenge with 3SKey is mobile, Jolly noted, as corporate policy in the US and Western Europe does not let staff use smartphones for treasury. One participant added that another disadvantage is that 3SKey is not web-based as it is laptop-specific, and both Jolly and Watson acknowledged the issue but assured delegated that solutions are being considered.
Coping with the Burden of Regulation
Regulatory changes add to the complexity of treasury management, and participants looked at how corporates are adapting to the negative consequences, while still growing their business.
François Masquelier, treasurer at European entertainment network RTL Group and an active member of Europe’s Association of Corporate Treasurers (ACT), said that in recent years the ACT decided to incorporate the association because it was necessary to have a stronger voice and to lobby. ACT decided not to let just the banks decide on payment schemes and formats. Masquelier said bank account management has also changed and RTL is focusing more on its core banks, gradually getting rid of tier 2 or tier 3 banks. A benefit of the regulation has been a reduction in the number of counterparties
PayPal’s assistant treasurer, John Christensen, said that managing relationships with banks has become more complicated. His firm is constantly looking at allocations on credit, risk of counterparties, ratings, spreads and balances. Regulations such as the Basel III capital adequacy regime and Dodd Frank have an impact on eBay, because the cost of capital will go up. It affects which banks want to work with the firm, and eBay has had to set up a group to conduct weekly counterparty risk review meetings. While it is important to do business with banks you like, he said, it is also important to make sure country managers do not go out and solve their own problems without the corporate treasurer.
Turning to the Middle East, Financial Services Association (UAE) co-founder Arwa Hamdieh said the Gulf region has been coming through a transitional period, and regulators are looking to add new regulations. The relationship between banks and corporates in the Middle East is evolving from banks relying their own one-on-one conversations with the regulators to working together as a group, and the Association is helping the financial industry facilitate dialogue with regulators.
HSBC global head of liquidity, payments and cash management Tom Schickler said that he sees regulators looking for transparency, which can streamline approaches and enable banks to focus on things that add value. Bankers also need to develop relationships better, and HSBC now measures people on how they are creating sustainable relationships. The value of a relationship is better understood, and he expects relationships will be based increasingly on the value contributed by both sides.
For those not familiar with the MENA region, the insights from panelists and the data they provided showed the tremendous opportunities in this part of the world. While corporate treasury, cash management and payments professionals undoubtedly face many challenges, solutions like 3SKey and new technology are providing new solutions. As the Corporate Forum has ended,
will shift its focus to innovations and the fascinating opportunities in new markets or corridors such as Myanmar, to be reviewed on the final day of SIBOS on Thursday.
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