By K Nanda Kumar
SunTec Business Solutions CEO.
Banks are increasingly focusing (or needing to) on sourcing more dependable and recurring fee income due to the pressures of abating interest income, combined with the economic slowdown and credit crisis.
Banks today are going through probably one of the toughest times in their modern existence. The subprime crisis and the ensuing credit crunch have led to worldwide economic slowdown with some banks (and big ones at that) filing for insolvency and many of them struggling for growth. And if you thought that was all - mergers and acquisitions are intensifying the competition while wholesale banking products have become mere commodities that offer little differentiation. In short let's greet (if only we had a choice!) the new era of banking ‘Banking in Troubled Times’.
Bank’s customers of wholesale banking are going global, seeking new markets and dealing with multiple companies in numerous regions. More than 40 per cent of corporates in the world trade with eight or more countries/regions, many with hundreds or even thousands of individual suppliers. As the complexity increases with multiple operational regions, suppliers and buyers, corporate treasurers are under immense pressure. With the credit crunch, liquidity is tight and market conditions are challenging. Corporate treasurers are mandated to unlock every penny of working capital trapped in supply chains. Treasurers are under pressure to cut the total cost of financial operations from the current levels of around five per cent of revenues to as low as two per cent. To deal with these issues, corporates around the world have found a ‘practical’ solution –Consolidation - consolidating their treasury functions and their bank relationships. A corporate survey by gtnews showed that more than 65 per cent of the corporates already manage or plan to manage their treasury globally. Corporates wants their global treasury organization to deal with a single bank that caters for their end-to-end needs.
Banks wishing to meet this end need to provide a single operating window and integrated product offering for all corporate financial needs which include cash management, payment, trade finance, commercial lending, securities and investment solutions. The global treasurer can deal with this single operating window for all their financial needs instead of dealing with multiple product lines in multiple regions. This will dramatically reduce the complexity of banking relationships for corporates and also provide the corporate with a single view of the firm’s cash position/balance – This in turn will help them to improve forecasts surrounding the global liquidity position and risk, financial needs and make better investment of their cash while reducing bank charges.
Providing a single window solves the operational and cash forecasting/investing issues of the corporate, in the same way that product and pricing issues can be solved by providing integrated offerings. Banks need to put forward integrated offerings that include multiple products from different product lines to suit specific customer needs. An example can be liquidity management, which includes products such as cash pooling, corporate loans and funds transfer from cash management, commercial lending and payments product lines respectively. These products individually have less relationship value and transaction value. But when they are bundled together to form liquidity management, its transaction value and relationship value magnifies. When it comes to pricing, most of the banks take a ‘one-size-fits-all approach’. Banks need to value the entire relationship and volume of business that the corporate has with the bank by dynamically pricing the integrated offerings based on various parameters like volume, value, balance, regional variations, usage history, and anticipated usage.
So we have a challenge and a solution But is it as easy as it sounds? If only it were.
The Hurdles: Organisational & Technological Silos
Now the question arises, what restricts banks from providing the aforementioned? The answer is rooted in the way banks are structured. Currently most of the banks have a product centric architecture in which they have organized their operations and technology around heterogeneous product silos within wholesale banking namely cash management, payments, trade finance, commercial lending; each working as an independent entity. The customer has to deal with each of these product silos to cater to their entire wholesale banking needs. These silos make it hard for corporate customers to manage cash or conduct trade using the bank’s services.
The picture is bleaker if we look at the technology side of the coin. Each of these product silos have multiple systems catering to their needs. These systems don’t talk to each other, making it impossible to create integrated offerings. The architecture becomes even more complex when incorporating separate systems for different regions.
Single Operating Window: Global Transaction Banking
Future-facing banks around the world are aligning their operations with customer needs, which has led to the emergence of a new business line called “Global Transaction Banking (GTB)”. GTB combines products from cash management, payments, trade finance, commercial lending and investments around the world in a single business line. Corporates can work with this business line to satisfy their entire needs in wholesale banking. In the back office, banks are streamlining systems inside product lines - consolidating their treasury systems, deploying payments hubs and upgrading to modern trade systems, each taking up tremendous time and cost. These initiatives reduce a lot of manual processes and bring efficiency inside product lines, but do not cater to the ultimate corporate needs. Though they interact with a single front end solution the banks back end systems remain product centric. The streamlined systems adheres to the needs of the particular product line and restrict banks from providing integrated offerings and knowing the entire business that corporates have with the bank.
Some of the banks that have embarked on the GTB initiative include Barclays, Citigroup, Scotiabank, Deutsche Bank, JPMorgan Chase, ANZ Bank, RBS, Grupo Santander, HSBC, ICICI Bank and Emirates Bank. In fact the banks that formed GTB business lines have already started reaping its benefits. Amidst turbulent conditions, eight of the banks mentioned above reported an average of 18 per cent higher revenues in the first half of 2008 for their GTB business line than the previous year.
Now, the formation of GTB does solve the single operation window challenge. But the siloed product centric systems in the IT infrastructure restrict GTB from providing integrated offerings. To meet the challenges banks should take a customer centric approach rather than a product centric one. Banks need to reorganize their operational and technological structure around customer needs and not around the bank’s.
Automated & Centralized Pricing and Billing
In GTB the basic products remain the same; it uses the existing base products to create new integrated offerings. Putting in place another core processing system for GTB adds another product centric platform to the infrastructure and increases the complexity. So what GTB needs is a wrapping layer around the individual product line’s streamlined core processing systems, so that banks can create packages or integrate multiple products from these different product lines to provide integrated offerings like working capital management and supply chain financing.
Here comes the importance of automating and centralizing the pricing and billing practices across wholesale banking, which forms the wrapping layer. Most of the banks have their pricing and billing embedded in their product platforms. These systems are either manual or semi-automated which are inflexible and prone to errors. Banks need to extricate the pricing from disparate product platforms/core systems and centralize the pricing & billing across wholesale banking which can interact with all product processors like trade systems, payment hubs and treasury systems. Such a centralized pricing and billing system helps the bank to create integrated offerings which feature products from a variety of lines. The appetizer benefits would also include dynamic pricing; differential pricing based on various parameters related to the customer, product and transaction, global price lists that accommodate exceptions such as account regional variations. The other benefits include a single global statement to the customer,transaction level accounting and price modelling to help banks test price plans against competitors and make changes on-the-fly reducing the time to market.
By providing integrated offerings, a single window to deal with and valuing the multiple touch-points a customer has within the framework of their relationship, banks can significantly reduce the complexity that a corporate needs to deal with, paving the way for a whole new world of customer experience. Banks who have adopted this convergence strategy are already seeing huge success even in ‘troubled times’.