The APAC Cash, Trade and FI Report Key Findings
Interviewed By TAB RadioFinance
The transaction banking business continues to be buffeted by change. For instance, the increasing adoption of open banking and open APIs is transforming banks’ and financial institutions’’ fundamental technology and operations architecture.
Good afternoon and welcome to the RadioFinance briefing on The Asia Pacific Cash Management, Payments and Trade Finance Trends and FI Satisfaction Report. I am Siddharth Chandani, Researcher at the Asian Banker. I will be conducting this briefing, which is part of our annual review of the transaction banking business in Asia Pacific. Through this briefing, we will be looking at the emerging key trends and best practices on product and service innovations shaping the industry in key markets in the region.
Perhaps nothing best summarises the current transaction landscape, as one being in a state of constant ‘ecosystem shake-up’. The industry and businesses continue to be buffeted by change with emergence of new technologies, entry of digital only players and an increasingly onerous regulatory environment – all which has thrown open a plethora of risks and challenges for transaction banks. Heightened customer expectations and stiff competition from third-party financial services providers has forced banks to increase their adoption of open banking and APIs. This has led many banks and practitioners to re-evaluate organisational strategies, technology, operations, as well as key customer relationships to ensure the sustainability of their franchises. In today’s briefing I will touch on:
- Emerging key themes and trends in transaction services including cash management, trade and supply chain finance and payments
- Best practices as identified by regional and international transaction banks in Asia Pacific and
- briefly analyse and evaluate the strength and ability of an agent bank to serve their correspondent banking clients as part of our annual FI satisfaction survey.
For the past decade or two, transaction banks competed for a larger pie of corporate businesses by providing cost-competitive, plain vanilla services, as fee-based activities drove significant revenues. The fallout of the financial crisis in 2008 saw ultra-loose monetary conditions and regulators re-writing rules of managing liquidity risks more prudently. Since then, transaction banking has been reshaped by strong forces of disruption- one driven by rationalised relationships, increased regulatory scrutiny and above all, market penetration of digital players into traditional business lines. Although monetary conditions somewhat began to tighten as global economic conditions improved, the same did not translate into profitable businesses performance for financial institutions. Much to discomfort of higher borrowing costs and volatile exchange rates, corporate defaults emerged, pushing the heavily exposed banks into the red.
To circumvent these challenges, corporates demanded a better view of their cash positions, refocusing the industry’s attention to optimise cash flows by tapping onto new digital solutions.
The rise of sophisticated cybercrimes, terror financing and imposition of sanctions made for a topsy-turvy trade environment. Evident with greater attention in meeting compliance requirements, trade financing banks have become extra vigilant in maintaining key correspondent relationships. Players are anticipating the pickup of private and government collaboration, powered by blockchain and platform technology to lead the industry into a secure and efficient future.
Rapid pace of digitalisation and growing market pressure to provide fast, secure and transparent cross-border transactions has led the industry innovate massively around payment infrastructure. Demand for real-time payments is beginning to have a profound impact on the payments ecosystem for all stakeholders as industry looks for solutions leveraging APIs and platforms.
We will now briefly drill down into trends across cash, trade and payments, individually.
Global and regional cash management banks across Asia-Pacific are making substantial investments into digital to enhance the overall transaction experience of their clients. Driven by renewed corporate aspirations, banks are identifying ways in which they can deliver better digital services to thrive in a low-margin, high-cost and a high-tech business environment. Changing role of corporate treasury from basic cash management services to more complex and centralised functions have propelled the industry to introduce automated products. Based on annual transaction survey of financial institutions across Asia Pacific, top emerging trends for cash management include:
- Continuous investment in digital transformation to better understand client behavior, cash forecasting needs as well as being price competitive
- An enriched payments experience with complex global financing needs which require application of advanced solutions to optimise transaction turnaround time (TAT) while lowering operational costs
- Achieving operational and service excellence as FIs can no longer survive by offering simple products and services constructed on primary elements of interest, duration and quantum.
Knowing that digital innovations holds the key to improve transactional efficiencies, we also note that costs for making progress on this remains far from cheap.
From making tactical improvements in order to make clients day-to-day life easier and migrating clients from high-cost payment to low-cost payment channels, banks listed timely access to cash flows, managing transactions on the go, optimising account structures and offering better visibility and control of working capital functions as major client imperatives in 2018. Built around these,
- Delivery of end-to-end solutions across clients’ business ecosystem,
- Optimisiation and integration of cash management services to meet customised needs, and
- Adherence to compliance policies and safety against risks,
were identified as best practices under cash management. These also include adoption a standardised set of protocols that deliver greater flexibility and convenience in meeting client requirements through their digitally powered platforms.
Moving on to the next segment, we will now explore key themes and best practices, as identified by trade finance banks.
As mentioned earlier, the results of the Asian Banker annual survey of trade finance trends across Asia-Pacific pointed to substantial degree of consolidation as cross-border activities, including trade transactions slowed. The recent trade tariff escalation between China and the US, shifting trade corridors and supply chain patterns with divergence in exchange rates between US dollar and other emerging market currencies have quite challenged the global trade outlook.
To cushion the slowdown, a pocket of opportunities arising from the growing importance of open account transactions and the shift from bank intermediated trade products to host-to-host and electronic channel have culminated into reducing these risks through trade digitalisation. Based on annual transaction survey of financial institutions, emerging themes for trade finance include:
- Calibrated innovation in trade finance products and services as reflected by the shift from traditional or documentary letter of credit (LC) based transactions to open-account and decentralised distributed ledger technology (DLT) based transactions
- Proliferation of electronic channels and trade finance solutions to improve customer experience via portal upgradation through single login capabilities
- Deep engagement with clients to power end-to-end supply chain financing solutions and positioning them at the heart of operations, right from day one of executing a trade deal.
Best practices from trade finance survey findings manifested themselves as commitments to investments in technology. Across the spectrum, banks identified modernization of their trade platforms, cooperation with other banks and emerging non-bank players and outsourcing and offshoring strategies as key best practices. In addition to these,
- Introduction of new products and services
- Measures to enhance fraud and security management
were also identified as other notable best practices.
Our next segment stands at the threshold of both cash management and trade industry, especially as real time processing becomes the norm in domestic payments. And as it does do, it is bound to create significant market pressure for cross-border payments to follow suit. Observing the need to meet new service standards, new emerging players have increased the pace of disruption to capture parts of payment value chain. In the previous Asian Banker annual survey of payment trends across Asia-Pacific, innovation in payment solutions and drive to digital were key priorities for transaction banks. In the latest survey, priorities have manifested themselves into the launch of faster payment platforms and infrastructure, innovation leveraging open banking and focus in mitigating fraudulent transactions as key priorities. Based on annual transaction survey of financial institutions, emerging themes for payments include:
- Replacement of legacy payments systems by real-time infrastructure to deliver quick-to-scale products and customised transaction services,
- catering to a low-value, high volume payment economy
- improving traceability of cross-border payments owing to lack to standardisation in codes, and
- dealing with sophistication of cyber threats, data breaches and AML risks to ensure the soundness of the overall payment systems
From our survey on payments we also identified that demand for real-time payments was beginning to have a profound impact on the payment ecosystem for all stakeholders. Clearly, global transaction banks are at an advantage to gain market share on their scale and lower unit costs of investments but for smaller and mid-sized banks, the best practice involves the need to carefully consider their business models and strategically choose their ‘area of play’.
Our next segment of the presentation aims to provide a brief view on the assessment of international transaction banks’ client relationships with regional or domestic FIs. The findings presented are potentially used as a tool for internal benchmarking of international transaction banks’ engagement with the local FI community.
The results in the chart, identify the frequency at which an international bank partners with a regional FI player to undertake any type of transaction service. The international transaction banks on the chart, were voted for their ability to provide not only competitive pricing, but also for responsiveness and quality of services that help improve the regional bank’s transaction business.
From the chart, Deutsche Bank and Standard Chartered Bank tied for the top spot for the category of most internationally integrated bank with regional banks. Relative to last year’s assessment, Wells Fargo and Citibank toppled BNY Mellon and MUFG Bank. With a strong current footprint covering 15 key markets in Asia Pacific, Deutsche Bank has enhanced its existing operations model, which is a combination of local and near-/offshore units aimed at ensuring the closest possible proximity to its clients and partner banks. With more than 80 per cent of its income and profits derived from Asia, Africa and the Middle East, Standard Chartered Bank’s Commercial Banking serves over 40,000 local corporations and medium-sized enterprises in 26 emerging markets.
The next chart assesses the strength ranking of key features or important characteristics provided by international banks to regional FIs. It is based on the frequency by which each characteristic was ranked by the regional FI.
We note that as the transaction services landscape gets competitive and cut-throat, evident from drop in margins, the ability to offer competitive pricing and ‘value-added’ services was identified as top-rated characteristic for regional FIs.
With this, we conclude our briefing on the Asia Pacific Cash Management, Payments and Trade Finance Trends and FI Satisfaction Report. We hope that you have found today’s session insightful and useful.
Keywords: Open Banking, API, Cybercrime, Terror Financing, Blockchain, Platforms, Digitalisation, Cross Border Payments, APAC