Redefine relationships – transaction banking trends

13 February 2015

As the calendar turns towards 2015, the industry is seeing significant shifts in transaction banking, especially a movement away from traditional corresponding banking arrangements and a renewed focus on emerging markets such as Africa. Matt Tuck, head of the global corporate banking and financial institutions group at Barclays, runs through some key market trends dominating this sector today and highlights the need for a new collaborative model.

Correspondent banking, as it is traditionally understood, is changing. As financial crime hits the headlines, it has become evident that international correspondent banking networks may be vulnerable to misuse. The upshot has been an increase in regulation, with banks forced to deal with ever more anti-money-laundering and anti-terrorist-funding requirements.

In some instances, banks have responded simply by retreating from the higher-risk sectors. Between 2005 and 2013, the major players significantly pruned their correspondent banking networks, reducing them by 15% in Europe and 21% in the Americas.

These figures, from payment messaging services provider Swift, do not signal the end of correspondent banking. As of June 2013, approximately two thirds of international payments between banks still took place through such networks. But with concerns about cybercrime continuing to loom large - not to mention the compliance costs imposed by additional regulation - it seems that conventional arrangements are on the wane.

This picture is complicated by the fact that over the same time period, one has seen many banks minimising their own global reach. As financial institutions withdraw from less-profitable markets, they can no longer service clients in these regions directly and it is clear that collaboration is now more important than ever. The question is what that might entail.

According to Matt Tuck, head of the global corporate banking and financial institutions group at Barclays, the very term 'correspondent banking' is overdue a shake-up.

"I've thought for quite a long time that the concept of correspondent banking is something of a misnomer," he says. "The concept of providing cash management services in every currency to every client just isn't feasible in today's world. In traditional correspondent banking, we're providing cash management services to our bank clients and often they're providing services to us, but I think the market has evolved over the past five to ten years, meaning we actually work on the premise of partnership with other banks around the world - so it's highly likely that banks will be competitors, customers and partners of each other."

In the hot seat

Tuck sat down with Future Banking to discuss macro trends - the forces he sees as shaping global transaction banking as we move into 2015. At stake is the question of how banks are managing their relationships in difficult times. As the market assumes a greater mood of caution, how can financial institutions retain strong partnerships throughout their network?

"The fines that have been levied on financial institutions are well publicised and are quite substantial, and that's driving an industry trend towards derisking," he says. "That in itself presents challenges for the banks and also for the underlying clients that are impacted. More broadly, the old correspondent-banking model presents challenges to banks today, particularly from a financial-crime perspective, so making sure you have close partnerships with your bank clients is really important."

As Tuck sees it, this applies whether we're talking about cash-management services - such as Barclays would traditionally provide on behalf of its bank clients - or trade finance.

"As with cash management, trying to provide services to every country around the world simply isn't practical, and, therefore, we all need partners to help our clients," he says. "Trade is the lifeblood of all economies, and in order to help customers either from a funding-finance perspective or to mitigate risk, having the end-to-end value chain is fundamentally important."

In the first instance, Barclays will look to provide services directly. The company is still very much a multinational bank, and aside from its correspondent banking relationships, it operates in more than 50 countries around the world. In recent years, Africa has been a key area of focus.

In fact, the Barclays Africa Group, which combines the ABSA Group with the rest of Barclays' African operations, is one of its core home markets. Almost a third of its total workforce is based on the continent, which has been dubbed a 'growth engine' for its clients.

"We see Africa as a real emerging economy now, and obviously Barclays is very well placed given that we've been in many of these markets for a long time," says Tuck. "We're seeing a genuine interest from global clients to explore opportunities in Africa. We certainly feel that Africa is the next Asia - we're already starting to see real impact and pick-up in the local economies driven by import and export needs."

Global client base

The clients in question are typically looking for conventional banking services. Generally speaking, they are large multinationals that require the same services they have experienced elsewhere in the world.

As Tuck explains: "They're looking for on-the-ground capability to pay their staff, and to collect monies and move monies around; they're looking for trade finance to support their imports and exports; and they're looking for local lending to help get their local businesses up and running. That's why you need a local bank to help you, because you need to be on the ground and present and you need to understand how the local market works. We are basically talking about traditional corporate banking needs here and Barclays is very well placed to provide that."

The firm is also looking to add value to clients working in mainland Europe. Despite the challenges of recent years, it sees Europe as fundamentally important to the global economy.

"Clearly, Europe has been going through significant changes and continues to struggle economically," says Tuck. "At Barclays, we're taking a very long-term view on Europe from a corporate-banking perspective, and we still feel very strongly that it represents a good opportunity. We're continuing to stay focused on our clients, in that market physically as well as those clients coming into that market from around the globe."

Outside of Barclays' home markets, however, the need for collaboration is being acutely felt. Having exited various sub-scale retail banking operations in recent years (notably in Russia, India and Pakistan) the bank cannot provide branch services to all its global clients.

Instead, it makes an effort to partner with key institutions in the relevant jurisdictions. Importantly, these banks will be local to the market in question, ensuring cultural fit, and guaranteeing the same level of experience and services that clients have come to expect.

The risk factor

There is, of course, a degree of risk involved. Trade finance, as is well documented, can be used as an instrument for illegal activities and it is important to exercise caution when entering into any such transaction.

"You have to make sure you understand who you're working with and you have to understand the details of the transaction from end to end," says Tuck. "It comes down to knowing your customer, understanding what the opportunity and the risks are, and making sure you go in with your eyes open."

As to whom they can and can't trust, this doesn't come down to metrics, but rather to an existing affinity between the two institutions. Barclays only does business with clients it knows well, and works with each partner to understand their needs and the needs of the customers they serve.

"It comes back to knowing your customer strategy and making sure you're only doing business with the right type of customers," Tuck continues. "Where you're working with other clients who have underlying customers, you have to make sure that you're working in harmony to understand the expectations from a financial crime perspective - that you're working together to come up with the right solutions."

These working relationships must be navigated against a backdrop of changing liquidity regulations. As Basel III is implemented, banks are facing higher minimum capital requirements, with further measures due to be phased in over the years up to 2019. The associated challenges, from Tuck's perspective, have underscored the need for collaboration.

"For me, Basel III has been a long time coming," he says. "There's been a lot of debate back and forth around its impacts, and those impacts are now much clearer. We're really in the year where it starts to crystallise. Alongside our partner banks, we're now in the execution phase of dealing and implementing Basel III changes."

In practical terms, this means that banks need to maximise the liquidity they have, particularly trapped liquidity in offshore entities. It also means that correspondent banks need to become more 'real time' in their reporting capabilities. Under Basel III, this is not just about meeting their own internal needs, but also those of their clients - each partner must be able to see their real-time position, and monitor and maximise the liquidity they have in the system.

Over the years ahead, a further major driver of change will undoubtedly be technology. As banks seek to cut costs in this heavily regulated climate, they are seeking solutions that will help them increase their operational efficiency. Barclays has therefore invested significant sums of money in new tech, with its latest developments geared at streamlining the supply chain, improving customer transparency and tackling fraud.

"It's well documented from the very top of the house that technology will absolutely drive behaviours in the future, from a client and an internal perspective," says Tuck. "We see technology as a real enabler to remove the paper-based environment, especially around trade, to allow funds to move and trade to happen more effectively globally.

"Some of the things we're doing are around real-time reporting - giving our customers access to their balances and their positions on a real-time basis. We're also developing access channels where customers can see all of their transactions with us holistically in one place, through something called iPortal. So giving clients more access to information and simplifying processes through the use of technology is at the forefront of everything we're developing, and spending our significant strategic investment budget on."

Crime watch

Eliminating financial crime will continue to be top of the agenda. In September 2014, Barclays unveiled its new Biometric Reader, which was developed using Hitachi's groundbreaking finger-vein authentication technology. Customers will no longer need a PIN, password or authentication code - they will be able to access their online banking account simply by scanning their finger.

Available to Barclays' corporate banking clients from 2015, the device is geared at combatting identity fraud. Since finger-vein patterns are near impossible to replicate, this particular form of biometrics is recognised as highly secure, and is likely to be introduced more widely across Barclays UK branch networks in future.

"Your finger vein becomes the axis into the system," explains Tuck. "This is an innovative and interesting piece of technology that we're using to reduce fraud by stopping people from gaining access to our clients data and technology."

With the global banking sector fast evolving, Barclays' goal is the same as it ever was: to help our corporate customers to be successful, be that with their financing needs or in facilitating trade, mitigating risk or moving money, no matter where they are in the world. Meeting this goal will certainly require a spirit of innovation, including continued investment people and in leading-edge technology.

Equally, though, it will mean partnering up. As a new era of interdependence takes root, the institutions that succeed will surely be those that work together towards shared aims.

Matt Tuck started his banking career at Barclays in the mid-1980s before moving to J.P. Morgan. He then moved to Citibank in the late 1990s. Prior to rejoining Barclays in 2011, he held positions at Deutsche Bank, running teams in Europe and Asia.