No matter the size of your bank, your business customers with growing global needs are pressing a critical decision on you: Should you invest in a full-fledged international infrastructure, make just an incremental technology investment in one global payments area, or outsource the whole business to an upstream provider? As you choose your strategy, are you uncovering all your risks, including the biggest risk of all – whether your strategy will indeed secure your customers’ loyalty?
The explosion in international trade has propelled many companies into a world where suddenly their suppliers, vendors, employees and/or customers might be any place on the globe. Overnight, they are immersed in a complex environment fraught with unknowns: new laws, new parties, new jargon and new worries like exchange rate volatility. They need banks to ensure the flow of trade and payments across borders, provide access to credit lines and liquidity no matter where or what time of the day or night, and to minimize their risk and that of their trading partners. The revenue potential is enormous.
If these companies turn to their own local banks where they have long standing, preferred credit relationships but lack experience in the international arena, they will take their lucrative global needs to one of a handful of multinational banks with a huge experience advantage, or even to a non-bank with a regulatory advantage.
Increasingly for mid-sized and smaller banks, that is an intolerable competitive inroad. As an executive at one mid-sized bank put it, “Look, maybe today we only lose a few annual transactions when we let a customer take their global needs to the big bank across the street. But that bank will quickly surround our customer with offers and services, and we will find ourselves competing to hold onto business that we already earned the hard way, let alone the lucrative new fee income.”
Risk and Regulatory Minefields
As these local banks seek the right global payments strategy, they are heavily pressured by vendors to go all the way: insource all global payments and trade, end-to-end. Yet, these are momentous decisions. Besides the huge revenue opportunity there are the obvious technology and operational processes that must be put in place. Less obvious are the heightened risks. Many mid-sized and smaller banks are unaccustomed to the level of risk and regulatory minefields of international commerce. Add to that the risk of whether the new investments and capabilities will actually keep the customers they are intended to keep.
This kind of unfortunate scenario is not rare: A bank launches a specific foreign payment capability, at no small expense, to keep a business customer and earn the incremental revenue. Not long after, the customer realizes the funds have to be held in euros, so now they need multi-currency accounts. And, of course, the financial reporting for them. A few weeks later, “For those new euro accounts, we need new risk management reports…” The customer’s needs expand, the bank has trouble keeping up and eventually loses the customer anyway without recouping its investment.
In our estimation, not even the largest, most multi of the multinationals can deliver a complete end-to-end global payments solution for all of its customers in all the markets those customers find themselves. Most banks are learning that success – revenue and risk-wise – lies in defining their chosen niche precisely at the outset, delivering it exceedingly well and finding the right partners for areas outside their niche.
To do so, they must perfect a critical new discipline of managing their global networks across all partner banks, correspondent banks and “Nostro agents,” or banks in foreign countries that hold accounts for a domestic bank with funds denominated in the currencies of the foreign countries. It should involve a broad set of business expertise: analytics, enhanced management reporting, project costing and feasibility and profit & loss management. Without this discipline, banks are likely to be surprised when new revenue fails to cover new investment costs and when the variety and uncertainties of counter parties create intolerable risk.
As each bank ponders the right set of decisions, a few guidelines can be helpful:
Above all, think “risk.”Every new business comes with risk, but newcomers to the global arena are often overwhelmed when they see the size and interplay of unfamiliar risks they encounter: credit risk, market risk, country risk, operational risk, compliance and regulatory risk.
Bank size doesn’t dictate strategy. The right global answer for any given bank is indifferent to bank size. The surge of business in Central and Latin America is creating opportunity for even small banks on the Gulf Coast. As their customers – businesses and consumers alike – increase their foreign transactions, these banks are seizing their opportunities early, hoping to fence out competition from large banks while they perfect their own international capabilities and bind their customers even closer.
Start with true business needs, not vendor evaluation.Starting the business case with vendor evaluations has a way of brushing aside more significant business considerations. It can end up setting strategy by default and cause banks to overspend by presupposing functional needs that may or may not be of top priority to the bank’s customers. It can also create excessive dependence on vendor input before the bank itself has had a chance to climb a learning curve and present the vendors with its own set of critical expertise: the precise needs of their customers. In addition, as discussed above, if customers’ needs are not fully explored, the bank may lose their business even after spending to keep it.
If you invest, make sure you think “scale.”Today your biggest customer might only need to buy Mexican pesos, but the macro trend is toward a globalized economy, regardless of zigs and zags or regionalized setbacks. Eventually the same customer will need to trade in the currencies of other countries, or will need other international services (forward contracts, currency options, multi-currency loans, or cross-currency swaps) or other international services like settlement, cash management and multi-currency DDA, and ultimately retail services, too. You don’t want to have to redo your processes to accommodate every new change, so building for scale is essential.
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