For banks which are active in the global transaction banking arena Basel III and SEPA are likely to bring both threats and opportunities. Frances Maguire talks to industry experts about these and assesses their potential impact.
Transaction banking sits at the core of every large bank – it is the heartbeat. The combination of trade finance, payments and cash management services means that it is an essential service, that survived the downturn and economic turmoil, but this is not to say that it is not being caught up in the transition and regulatory reform that lies ahead. However, while the large transaction banks are gearing up for change now, the full impact of the changes needed by corporate treasuries is yet to be seen.
Ruth Wandhofer, GTS Head of Regulatory & Market Strategy at Citi Global Transaction Services says that both banks and their clients are now entering an accelerated preparation phase for SEPA given the February 2014 deadline. With the regulation now expected to be published in April, SEPA migration has been given a clear start date.
She adds that a number of practical implementation and interpretation questions, which will be addressed in the forthcoming SEPA Regulation Guidance being prepared by the Payments Regulatory Expert Group of the European Banking Federation, remain for the industry to resolve. However, many requirements are already clear – including that all banks will have to have ISO 20022 XML IT processing capabilities, an area that not all banks have invested in to date, and she believes may trigger some momentum on the provider side in the context of strategic decisions around insourcing or outsourcing those processes.
In terms of the broader impact on global transaction banking, Wandhofer says the harmonisation of the euro low value payments space will facilitate flows within Europe, as well as the way flows are processed between Europe and other parts of the world. “Corporates and banks making low value euro payments via a European SEPA bank will benefit from the more harmonised approach. The overall standardisation around ISO 20022 XML is at the same time becoming an increasing trend that is also seen in the US and Asia for example. In the long run, such standardisation will be able to support a more globalised payments space, which would bring significant support to the real economy,” she adds.
Basel III is arguably already a reality for many global transaction banks. According to Wandhofer, the measures are designed to stabilise the financial system and reduce the likelihood of bank failures/bail-outs by requiring banks to hold more and better quality capital, ensure that larger liquidity buffers are available in stressed periods as well as in a general long term scenario, at the same time as limiting banks’ leverage by imposing a non-risk adjusted 3% limit.
She adds: “A key consequence of the increased safety triggered by these measures will be a parallel increase in the cost of doing business. For example, corporate and bank balances are considered by the Basel III approach as less sticky than retail balances, which will result in lower remuneration for the first two categories going forward.”
Additionally, she believes there is a risk that the real economy will be negatively impacted by the fact that the treatment of trade finance under Basel III will translate into significant costs, despite the lower risk nature of this type of business. “Together with the industry and our clients we are strongly in favour of a revision of the proposal in this area – for example, to exempt trade from the leverage ratio,” she adds.
The environment in which the financial services industry operates and the industry itself have undergone dramatic changes, and Wandhofer believes the plethora of new regulations will further impact the relationship between a bank and its corporate clients.
She says: “post-crisis there has been a tendency for a renewed national regulatory focus, which may result in more fragmentation than pre-crisis. From the perspective of a global bank, the different regulatory approaches being seen across regions will challenge the provision of a consistent service proposition to a global client base.
“Additionally, corporate treasurers are looking for continuous improvements in the visibility of their cash, ensuring more control and less reliance on bank funding. This certainly supports the trend towards centralisation of treasury operations. Banks increasingly need to be able to support their clients with tools that enable increased efficiency in this space, and to provide solutions that allow a corporate treasurer to have greater visibility and control of their balances on an ever more real-time basis.”
According to Kevin Brown, Managing Director and Global Head of Product Management, Global Transaction Services, at RBS, the fact that we now have clarity on a SEPA end-date, other than for specific ‘niche products’ which have an additional two years, marks a major step towards the realisation of a single domestic payments area for euro transaction payments.
He says: “Now that a clear timetable has been set, transaction banks and their clients are starting to prepare for the changes that will follow. At a market level, work is already underway on the production of practical ‘best practice’ guidance to help banks and corporates plan their next steps. At RBS, we are actively engaged in this activity at pan-European and national level, at the same time as continuing to promote the need for SEPA to be implemented on as consistent a basis as possible across Europe, in the interests of maximising the potential efficiency and competition benefits on offer.”
At the same time, he adds: “other regulatory developments are occurring, in particular the European Commission has recently started reviewing the Payment Services Directive, which provides the harmonised legal framework to underpin SEPA, and has also recently launched a major market consultation on the future of card, internet and mobile payments in the form of a Green Paper.”
Given the uncertainty surrounding the final shape of Basel III, Brown, who chairs the Swift user group on regulatory changes, says that RBS is working to help clients avoid the consequences of incorrectly anticipating the regulation. For example, there is positive speculation about the prospect of more favourable treatment of operational deposits under Basel III, but uncertainty remains over what the rules will ultimately be, and banks are still awaiting clarity on how operational deposits will be defined.
He adds: “the availability of timely and accurate data, and tools, to better manage liquidity will be a challenge for the market. It is also at this level where banks can differentiate themselves with tools and services to support their clients to meet their regulatory requirements and mitigate the impact of regulations. There is a trade-off between de-risking banking activities and ensuring funds are available for risktaking in the economy, balancing between stability and growth.”
One consequence of increasing standardisation, especially resulting from the introduction of SEPA, is an increase in joint ventures between banks and technology providers. Brown says that banks have recognised that there are services that are transitory in nature. He says: “for example, many banks use a technology vendor for BIC and IBAN validation and there is no question of customers being unhappy with such an arrangement. The commoditisation of the payment process has been accepted.”
This acceptance that multiple parties can deliver different parts of the value chain without compromising quality or security aids both clients and banks. It reduces time to market and allows for the rollout of a product in multiple locations where a bank might not be present. Most importantly, Brown says it is possible to achieve these goals without impairing customers’ operational efficiency. Almost all recent corporate RFPs now reflect this reality. “Obviously delivery is still critical, but equally important for the treasurer of tomorrow is that risk, liability and accountability is held by the bank,” he says. “Whilst corporate treasurers understand the need and benefits of using multiple providers, they do want to be able to have a consolidated view and it’s important that banks are able to provide centralised reporting tools to give a single view to mitigate risk.”
For Brown, the new regulatory requirements will also decrease the flexibility in the way banks are able to perform their maturity transformation service. This will have an impact on its products and services, and the costs for clients to do business. He believes it will also require clients to develop their treasury function and improve their knowledge on cash flows and cash flow forecasting, an area where the bank is well positioned to advise, connecting into the requirement for banks to increase possibilities to capture and analyse real-time data.
Jerry Norton, Head of Banking, Financial Services, at Logica says that the agreement of a SEPA end-date has resulted in the bigger transaction banks starting to position themselves for volume and business from large corporates. Although the business in SEPA payments is not yet flowing, he still has seen a distinct uptake in the positioning and readiness of banks, targeting the multinational European corporates. “It is true to say that all the transaction banks have got SEPA offerings, and the demand is beginning to be seen,” he adds.
However, he adds that as the final date for migration to SEPA instruments gets closer, a lot of wrinkles are now being uncovered, such as country differences, accommodating national practices and national IBAN variations.
With SEPA migration broadly finalised, Norton says that Basel III is now the focus. These new regulatory requirements will definitely have an effect on transaction banking. Basel III will impact collateral management and the way in which payments are processed. This may have an ancillary effect on correspondent banking, which is likely to impact volumes and thus change the relationship between banks and their correspondents.
Norton adds that it is also becoming clear that European regulation, EMIR in particular, will lead to a fundamental structural change within transaction banking. He says: “a number of banks are looking at combining transaction banking with the investment banking back office. Traditionally, the corporate transactional side of the bank was kept separate from the trading side, sometimes even having separate payments systems. What Basel III and EMIR are doing is changing the organisation of the bank, with global transaction services effectively taking more responsibility for transactions in the investment bank. This is partly for collateral reasons, and partly for expertise reasons.”
The upshot of the changes that are occurring is that corporates are starting to centralise their treasury operations – something that is encouraged by SEPA. Treasury will become more about payments and transactional operations. But Norton believes that corporates are frustrated with the banks because they think that the relationship between banks and corporates has not changed very much in the past few years and they still think that banks don’t listen to them properly and come up with products that are complex, expensive, and are not really doing what they need them to do. This is something that will be tested when the full impact of Basel III, and what kind of products the banks bring out, is known. He says: “there may well be an element of cherry picking of corporate customers as a result, in terms of liquidity and the payment profiles banks are looking for, in a way there has not been before.”