BUILD OR BUY?
By Rebecca Brace
As regulation and competition in the transaction banking space spur higher levels of technology investment, banks and vendors have found new ways of working together.
The demands on global transaction banks for technology investment have never been greater. Over and above the need to invest in solutions to meet changing regulatory requirements, banks must also invest just to remain competitive. But with so many areas to invest in, they have revisited the way in which they develop their technology. Gone are the days when banks would build their own proprietary systems. Today global transaction banks are increasingly working with technology vendors to deliver corporate solutions in order to reduce costs and free their internal resources for more value-added services. “It’s becoming less feasible for banks to build rather than buy, both from a cost point of view and also in terms of resource capacity,” comments Robert Mancini, senior analyst at Celent.
Mandatory spend falls into two categories, notes Rajesh Mehta, EMEA head of treasury and trade solutions at Citi Transaction Services. “The first is regulatory-driven, whether that’s in relation to Dodd-Frank or the Volcker rule or greater reporting requirements to central banks. The second element relates to infrastructure change such as SEPA [Single Euro Payments Area].”
Banks have made heavy investments around providing data to companies to help them achieve straight-through reconciliation, notes Cindy Murray, treasury solutions executive for infrastructure, platforms and e-commerce at Bank of America Merrill Lynch. She adds: “Banks are really starting to invest in replacing their core platforms, and there’s a strong focus on the concept of a payment hub, which interfaces more easily with the bank’s internal systems as well as with clients.” BofAML has moved to a payment hub model and Deutsche Bank was one of the first big transaction banks to do so. Now, even Tier 2 banks are starting to move to hub solutions from external vendors for payments.
There is also a growing focus on collaborative projects. For example, mobile payments system Google Wallet is a collaboration between Citi, Google, MasterCard, First Data and Sprint. Although most such solutions are designed for a wide customer base, in some cases banks are using vendors to support a specific corporate customer. “The banks come to us and say they have a challenge with one of their largest corporate customers, such as helping the corporate send the bank bulk files,” comments Marcus Hughes, director, business development, at Bottomline Technologies.
Kevin Brown, global head, transaction services products, RBS, says the bank is using Clear2Pay to deliver its SEPA solution, rather than build an engine in-house. “Working with vendors can be cheaper as the vendor is already working on the solution,” he comments. “They have experience in the specific area of development, and as a result it means that we can deliver a solution which is faster to market.” Brown says leveraging vendors also helps future-proof systems.
“Banks are really starting to invest in replacing their core platforms, and there’s a strong focus on the concept of a payment hub”
–Cindy Murray, Bank of America Merrill Lynch
Increased collaboration has changed the relationship between a bank and its technology vendors. “When we first started working with vendors, it was more of a transactional relationship,” says Rhomaios Ram, global head of product management and chief information officer, GTB, Deutsche Bank. “You would write a set of requirements, and you would kind of flip it over the wall and hope they turned up with what you wanted later. Invariably that ended in failure and disappointment, which is what drove a lot of the development proprietary in the first place. What we’ve discovered over time is that actually you have to treat vendors like they are part of your in-house IT department and work with them continuously. That way, you get a much better result.”
As banks work more closely with technology vendors, interest in initiatives such as the Banking Industry Architecture Network has grown. Initiated in 2005, BIAN aims to create a flexible underlying technology architecture for banking services development. It now has more than 30 members, including banks, software vendors and systems integrators. “BIAN sets out to reduce the cost of integration and makes it easier for banks to take the risk of a transformation project,” explains Jens-Peter Jensen, head of banking architecture and technology at SAP.
However, for most corporates, the key issue is not how it’s put together. As one treasurer at a technology company noted: “Most corporates do not particularly care where our banks source their technology. What matters is how well it works, and how quickly it can be updated to match industry trends. Generally, most of us would expect the technology to be more flexible if it is outsourced. But what matters is the result, not how it is achieved.”
While much has changed in the past few years, GTB technology continues to evolve. Mobile is one important driver; the Cloud is another. Banks are only just beginning to become comfortable with the concept of the Cloud, but as this gains a greater foothold, new solutions will inevitably evolve.
THE CHANGING WORLD OF TRANSACTION BANKING
The world of global transaction banking has changed significantly in recent years, particularly since the 2008 global financial crisis. “Every bank that we know on the planet is investing in global transaction banking right now, whether that’s because it’s a more reliable part of the bank in terms of producing profit, or because interest rates have been low for so long that it’s hard to make money,” notes George Ravich, executive vice president at Fundtech.
Poonawala, Deutsche Bank: It is important to see the big picture
Banks are also restructuring their internal operations—for example, converging their cash management and trade finance activities. A survey carried out by financial technology provider Misys in 2012 found that 81% of bank respondents had already combined their cash management and trade finance businesses, and that only 10% had no plans to do so.
How important are such changes to corporate clients? On the one hand, the quality of products and services offered by a bank are of greater interest to a company than the bank’s internal structure. On the other, it’s fair to say that the bank’s structure can have a significant bearing on the treasurer’s overall experience.
“Clients want to work with individuals who can see the big picture,” observes Akbar Poonawala, regional head of global transaction banking for the Americas at Deutsche Bank. “It doesn’t make sense for one product person to walk into a client’s office representing the trade finance business, and as they are walking out, have a depositary receipt person walk in.
Corporates expect coordination and understanding of the overall relationship and of their needs, as well as the ability to think beyond one product or one country.