By Denise Bedell
Corporates are demanding increasingly sophisticated cash and trade solutions within Asia. Those banks that want to stay competitive must step up their game.
Asia is a key growth area for transaction banking as a result of not only the internal economic development in Asian countries but also the increased international trade between countries and with the West. This drives a need for management services for trade finance, currency and working capital. As these trends continue, and as Asia's economy continues to grow in prominence, global transaction banks cannot afford to be without a presence in the region.
Anthony Nappi, head of global transaction services for Asia Pacific at Citi, says: "This region is the growth engine of the world." A combination of local corporate growth and increased investment by multinational corporations means the region is an increasingly important market for transaction banking services. Its importance will only continue to grow as Asia's share of world trade increases. "The increasing growth of the middle class will create a new demand for goods, and consumption will increase, thereby decreasing—not decoupling—reliance on the OECD markets," says Nappi. "FDI/FII continue to flow into the region, as the world continues to see Asia as the region for growth and as more fund managers come to Asia. The commercial and capital flows that result from these trends all form the foundation of the continued growth of the transaction banking business."
All of the biggest global players have already begun to shift focus and assets to the region—growing their local footprint, as well as increasing staff and resources to build their transaction banking presence. The next step will be for global banks and domestic providers to develop more products geared specifically for the diverse domestic markets that make up the region. Neil Katkov, senior vice president, Asia, at consultancy Celent, says: "Transaction banking services offered by domestic banks in most Asian markets are still behind the offerings of the big global banks."
Nappi: “Now it’s impossible to find a company without an Asian strategy”
In more mature markets—for example, Japan—the main domestic players have been improving their cash management offerings over the past few years and focusing on Internet delivery. In contrast, developing markets offer limited cash management solutions for corporates. Because demand is more mature than supply, many of the big global cash management players have been ramping up their presence and delivery capabilities throughout Asia.
Says Katkov: "Most strikingly, global banks are seeking partnerships with domestic banks to deliver services to local corporates." This partnership approach works well, as domestic banks generally control the local customer base but lack the advanced services and global network of the multinational banks. It gives global banks access to the domestic corporate market and local banks access to the range of higher-end product offerings that their clients want.
The demand for more-sophisticated solutions and platforms in Asia Pacific has skyrocketed. Linda McLaughlin-Moore, Asia Pacific head of treasury services product management & delivery at J.P. Morgan Treasury Services, says: "Companies are looking to banks to deliver new capabilities that will provide them with innovations to enhance their control over the corporate cash conversion cycle at a lower cost. The corporate treasurer is going to drive banks to deliver more for less."
McLaughlin-Moore: “Companies are looking for ... new capabilities”
To achieve the same or similar profit margins, long-term transaction banks will need to further centralize operations, standardize processes as much as possible and embed technology into their processes and solutions, which will ultimately help strip expenses, she notes.
Part of the difficulty, however, is that Asian markets are in a state of swift change. Local banking systems are undergoing rapid evolution, for example. This creates an issue when it comes to product development, because investments made now may prove fruitless in three or four years, as new regulatory and infrastructure changes occur. On the other hand, there is an openness to, and desire for, innovation that creates its own opportunity. Notes McLaughlin-Moore: "The push of e-check clearing in Thailand, for example, is well ahead of other developed markets, and in India, so too is the growth of low-value electronic banking. More generally across the region, mobile banking is far more popular than in Europe, the US and other developed markets."
In addition, the rapid development of the financial markets is providing access to funding that is enabling corporates to focus on growth and development and is driving their interest and investment in new technologies and platforms—adoption of which is happening at a much faster pace than in more developed markets. "The region is one of the most sophisticated transaction banking services markets in the world—and is home to an emerging breed of global corporate champions," says Nappi. "As they expand, they want transaction banking services that provide solutions to help them compete better in the global marketplace."
There is growing demand for regional and global liquidity structures, the consolidation of high-volume, low-value activities—such as payables and receivables—into shared service centers, working-capital and supply-chain financing solutions, as well as a significant increase in Export Credit Agency–backed solutions, Nappi adds.
Just like their Western counterparts, Asian corporates have learned the lessons of the financial crisis. They have focused more intensely on what they can do to drive bottom line growth and reduce internal expenditures throughout the physical and financial supply chain. They are, for example, looking to move fixed costs to variable by outsourcing noncore activities, such as payables and receivables."Another key driving force is the ability to maximize liquidity in the system. A few extra basis points on several hundred million dollars, over the course of a year, is definitely accretive to the bottom line," says Nappi.
Plus, as with companies around the world, one big lesson learned by Asian corporates during the recent crisis that is driving their demand for better, more-advanced and more-tailored cash and trade products is the importance of improved visibility and risk management. McLaughlin-Moore notes: "Interest rate risk, counterparty risk and transparency of balances all tie in to the growing demand for real-time information. While important before the financial crisis, these elements are now absolutely critical to a corporate looking to compete on a regional or indeed global level."
It is clear that Asian companies as well as global corporates with Asian operations are ready and willing to look at more-sophisticated solutions for regional cash and trade management. Those banks who want a piece of the action will have to step up and provide country-specific, globally integrated solutions if they hope to stay in the game.
Nappi adds: "Just a decade ago it was a case of hunting for companies with Asian strategies; now it's impossible to find a company without an Asian strategy. This region and how to expand in it is on the agenda of every major board meeting globally."