As regulatory and market shifts make growth increasingly challenging, banks are looking at how best to adapt. GTNews spoke to partner James Badenach, markets leader Jan Bellens and executive director Madhav Goparaju at EY on what the firm’s extensive surveys on key trends in the markets have revealed and the changes banks need to make.
Disruptions in transaction banking will differ from consumer or commercial banking, according to Bellens. Banks are looking for ways to innovate, focusing on meeting know your customer (KYC) and anti-money laundering (AML) requirements and reducing their infrastructure costs, rather than on innovations focused on corporate needs.
Along with increased regulatory requirements having increased, product programmes have become so siloed that banks see themselves going back to the customer asking for the same information multiple times, adds Goparaju. What banks are focusing on improving, then, is the process to onboard customers.
Regulatory requirements have also led to ‘utilities’ – where customer data can be stored in a single location – becoming a hot topic. While a utility has potential for improving the onboarding process, there are also challenges due to the sheer effort required to get the groups together, develop standards, have technology providers offer end-to-end services and reduce the fragmentation of the data sets that need to be checked.
While individual banks won’t address the issue, given questions about who owns customer data, a collaborative push by corporates as well as industry bodies such as the Bankers Association for Finance and Trade (BAFT) and SWIFT, can move a solution forward. “It’s such a big issue that in five years there will be a different conversation,” Badenach notes. “It will get fixed because it is such a big issue, or you’ll see disintermediation.”
Managing bank liquidity
Another key issue for banks is managing liquidity. Liquidity risk wasn’t well managed at banks prior to the 2008 financial crisis, so regulators are pushing them hard with rules such as the liquidity coverage ratio (LCR). “We are seeing adoption of more robust policies around liquidity, a rethink of where the value is in the chain and rewarding more on deposits as opposed to loans,” says Badenach.
A number of major banks even have started to turn customers away from making deposits because they have a negative return, reports Goparaju – or are asking corporates to use other products and services in return for the bank holding their deposits.
Intraday liquidity challenges present a further issue for banks. For a number of them deposits are driven by a small number of customers and there can be a significant effect on the balance sheet if those customers remove deposits for a day. While banks currently have a mix of systems and may have trouble tracking consolidated deposits, they will need to consolidate information. They can then figure out how to reprice clients who have deposits at the start of the day and move balances out later that day.
Corporates in Asia need cash visibility
While banks are focused on managing their own liquidity, Badenach believes that Asian corporates are more focused on having better visibility of cash and managing that cash more effectively. Corporates in emerging Asia, in particular, have only poor visibility over cash positions and lack the systems to manage cash better; an issue that is even more acute on a cross-border basis for countries with restricted currencies. Gaining visibility over cash is more difficult for medium-sized firms since, according to EY’s surveys, corporates need at least US$400m in revenue before they will set up a dedicated treasury centre.
Goparaju adds that corporates are also looking at working capital optimisation and where revenue will come from, as revenues are more challenged.
Since banks focus on regulatory demands as well as on bread-and-butter issues in transaction banking, they are still servicing corporates’ basic needs and doing little product innovation in areas that these clients are looking for. Banks would do well to focus on solving their needs.
Trade finance
Two issues drive the market in trade finance, says Goparaju. Firstly, trade that had shown annual growth of 12% to 18% for five years has dropped off dramatically and is no more than about 2%. While there is growth in some areas such as on the supply chain finance side, banks will need to go down-market to keep their revenue healthy.
Secondly, regulators who are focused on trade for fraud-related issues want banks to have systems to screen customers and provide much stronger operating control. Banks then need to do the basics more effectively, with less paper and fewer manual controls.
As they are behind in the adoption of technology for trade, they will need to focus on resolving the issues of looking for other revenue streams in response to the drop in trade and on regulatory compliance. Fintech is still in the “early days of noise,” so banks are likely to have time to work on resolving these issues before they focus on disruptors in fintech.
What comes next?
Since much of their lending was to financial institutions and that model has dried up, banks are looking at how to drive revenue to services.
“It’s a different dynamic,” Goparaju observes wryly. Banks will need to make significant changes if they are to thrive in an increasingly dynamic and challenging transaction banking environment.