GTR March April 2012 trade services


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GTR March April 2012 trade services

  1. 1. xxxxxx | xxxxxx & Supply Chain | Correspondent BankingTrade ServicesAdapt to surviveTrade finance services make up a vital part ofthe correspondent banking offering for financialinstitutions, but to maintain a stake in this marketbanks need to continue to adapt. Ben Poole reports.C orrespondent banks are not immune Rand Merchant Bank (RMB). banking market at Swift. to the economic challenges of recent “Alternatively, they will have to package “Banks need to continue to improve years, and their trade services are structured solutions using a portfolio efficiency of their operations. There are afeeling the squeeze. Globally, unless banks approach. These two points could well number of ways to achieve this: throughcan offer genuine added value, trade finance decide which banks successfully continue right-sizing; through focusing on the businessis becoming less profitable. To combat this, with trade finance and make a success of it, of their correspondents by using businessbanks should focus on delivering value and which leave it behind,” says Chaytoo. intelligence tools to see where thereacross the spectrum from supply to buy are business opportunities and throughside, rather than just focusing all of their Today’s challenges centralising their correspondent bankingenergies on risk mitigation. While correspondent banking is still an operations into global transaction services “For banks to remain competitive, they will attractive business, financial institutions are – all of which can improve the efficiency ofneed to provide competitive pricing,” says under pressure from new regulation and their operations,” he says.Suresh Chaytoo, senior manager and regional increasing competition. Banks need to ensure With correspondent banking having ahead, banks and development financial that they remain competitive and relevant in core trade element, there is still a stronginstitutions, Africa and Latin America at this space, says Wim Raymaekers, head of proposition for the banks in terms of areas34 | Global Trade Review
  2. 2. Correspondent Banking | Trade Services & Supply Chain xxxxxx | xxxxxxsuch as open account. However, these are There is also a cost from Basel III to the regulatory challenge that correspondentstill being settled through the traditional associated payments business and liquidity banks are facing, via a number of differentchannels. “The interesting thing is how the with correspondent banking. Liquidity has legislations, is the amount of anti-moneypayments landscape might change and the a price, and this price has not necessarily laundering (AML), screening, and know yourchallenges for correspondent banks around been factored into the correspondent customer (KYC) processing requirements.the payments arena more generally,” explains banking equation in the past. This has had The EU directive on AML and the USAKevin Brown, global head of products, the effect of making banks on all sides of Patriot Act, in particular, are challengingtransaction services at RBS. the correspondent banking spectrum run the activities of correspondent banking This is not just the case around mobile numbers and simulations, looking to find departments. All banks are looking at thepayments. There is a demand now from the banks that have been ahead of the cost of compliance, not least in ensuringclients for lower cost, low value cross- game in terms of raising capital for the that they are able to keep up with changingborder payments, not just in the single future to protect business for the next standards and requirements in terms ofeuro payments area (SEPA) but a broader few years. filtering and AML checking. Banks areproposition on a global basis. “I think that And while some banks have prepared eating into a lot of their development coststhere will be continued pressure on the well and increased the capital they hold, just to maintain their current position.traditional correspondent banking model some other banks will be behind the curve Even as far back as 2009, regulatoryfor payments to drive a lower cost, more a little bit in this regard. changes were forcing managers toeconomic solution,” says Brown. The costs associated with Basel III and reprioritise their spending plans. This was other compliance and regulatory initiatives seen in a poll at that year’s North AmericaThe regulatory burden are putting off some banks from further banks conference held by Citi in New York.There are two main areas of regulation that developing their correspondent banking “In their ideal transaction bankingare proving to be a burden for correspondent business. investment spend, we found thatbanking. The first of these is Basel III. With Typically, every bank has had some level management wanted 82% to go on newits increased capital requirements and the of correspondent banking, but in light of client solutions, with 11% marked out forfocus on trade and non-trade exposure, the cost burdens, will all banks continue to managing core capabilities and 7% onthe way that banks are treating liquidity is participate in classic correspondent banking? improving operational efficiency,” saysunder scrutiny. With this regulation, the Jeremy Shaw, head of trade finance Emea Matthew Hodgson, managing director ofBasel committee wants to ensure that at JP Morgan, suggests not. “Personally, Citi’s bank services group.banks are financially secure, that they are I think this market will consolidate “But when we compared this to actualadequately covered in the event of a run on into fewer banks actively engaged in spend the picture is very different.funds and that liquidity that can be moved correspondent banking. There will still be New client solutions were down to just “There will be continued pressure on the traditional correspondent banking model for payments to drive a lower cost more economic solution.” Kevin Brown, RBSvery quickly and efficiently. They want to a significant number involved, but we will 10% of the spend; managing core capabilitiesensure that if there is a significant outflow, see consolidation as the normal practice was up to 48%, while operational efficiencythat banks will remain in a strong position to of supporting 3,000-4,000 correspondent was at 23%. In addition, the amount of spendconduct business. banking relationships faces a heavy burden dedicated to regulatory changes made up Basel III has a large impact on from the various compliance requirements, 19% of this budget,” he adds.correspondent banking, as more capital is and this will only increase,” he says. While there are opportunities withinrequired for the trade business. This will have “If the financial dynamics don’t make correspondent banking to innovate andthe effect of reducing some banks’ appetite sense versus the risks, coupled with the create additional value for customers off thefor correspondent banking and trade increasing need for core capital, then back of the regulatory changes, the mainbecause they may not want to put aside that some institutions will question whether they driver for the banks is to make sure that theyextra additional capital, or it may increase need to maintain full-scale correspondent are compliant. This will continue to give allthe cost of providing these services, again banking departments.” banks a continued challenge in terms ofbecause there is more capital required. Beyond Basel III, the second main cost and March/April 2012 | 35
  3. 3. xxxxxx | xxxxxx & Supply Chain | Correspondent BankingTrade ServicesOrganisational structure Most banks have already been new capital requirements following the EBAMost banks today have consolidated their quite proactive in restructuring their stress test.correspondent banking arm into their correspondent banking units over the This translates into yet another challengeglobal transaction business, as this makes past three to four years with a focus on to trade. “Through a variety of risk mitigatingcommercial sense. Take Citi as an example; consolidation and improving efficiency. measures, we are seeing non-bankingthe bank self-clears 77 different currencies “That said, there could still be some more organisations such as insurance companies,as a payment provider to banks and consolidation in Europe as a result of the hedge funds and trade funds getting morecorporations, and makes payments in over reorganisation of banks there – this would and more involved. They are all moving into130 currencies throughout the branching be a function of mergers and acquisitions this area of trade finance,” says Reinhardnetwork and its network of third-party (M&A) in the European banking sector,” Furthmayr, head of financial institutionsenabled banks. says RMB’s Chaytoo. products and marketing at Commerzbank. “Because of the cross-border nature Despite this, opportunities still exist. Thereof our client base – top-tier financial Current trends is a lot of opportunity for banks in financinginstitutions, public sector, and multinational Today the correspondent banking world payable and receivable assets. Also, there iscorporations – we are connecting directly to is dealing with a number of trends in more of a movement from clean paymentsclearing houses, exchanges and depositories addition to the fundamental challenges into more structured trade-related allow our clients to get direct access to already mentioned. For example, there Meanwhile, the US dollar liquidity situationthese markets and these systems to be is currently limited US dollar liquidity, creates a demand that will be of interest toable to support their own clients,” says particularly in Europe. the larger players.Citi’s Hodgson. “Our correspondent banking Another problem seen in Europe at the While challenges remain, correspondentbusiness is core to our global transaction moment is the deleveraging of bank balance banking is still an attractive proposition forservices business.” sheets in the wake of the various regulatory those institutions committed to the cause. Consolidation is not a new thing. measures recently introduced, such as the GTR The next generation A Swift white paper on correspondent an attractive and popular business, but its The paper proposes that correspondent banking released in January has profits are being squeezed by increased banking should move to a new stage of called for advancements to be competition and regulation. development called “experience banking”. made in correspondent banking. The paper stated that correspondent The use of this term implies that banks It deems the current model as “too banking remains the main channel to deliver need to develop services that fit round their bank product-centric, based on inherently cross-border banking services. Looking at client’s lifestyle; for example a corporate inefficient multiple agreements”. Swift cross-border customer payments in treasurer who wants a real-time view of It noted that the correspondent banking August 2011, those settled bank-to-bank his company’s liquidity across banks and and payments processing business is still made up 67% of the total volume. different accounts via an ipad. Where does your bank play? 1.0 2.0 3.0 Correspondent Transaction Experience banking banking banking Mid 1970s Late 1990s Mid 2010s “Automate the telex” “Make it more efficient” “Banking made simple” Banking community created SWIFT Each bank improved its product Customer triggers banking service ●● Long list correspondence is sign ●● Central product & operations, ●● Integrated with client channel of importance GTB – managed as a business, and customer service provider ●● Main payments flow: EU-US market + business intelligence ●● Multi-polarity, more in Asia36 | Global Trade Review