A new world of banking

David Hennah, product marketing manager at Misys Banking Systems, reviews the growing relationship between trade and technology and highlights the opportunities for growth in developing markets.

For some time now the banking sector has been undergoing a process of rapid and widespread consolidation. The overall number of institutions has been in decline while the average size has grown. In the United States, the 1994 lifting of interstate restrictions encouraged a wave of mergers and acquisitions. In Europe, consolidation has intensified as a result of increased integration resulting from, for example, the introduction of the euro and the expansion of the European Union. In many of the developing markets of Asia, Latin America and elsewhere consolidation has also been embraced not only as a means of reducing costs and improving profitability but also enhancing efficiency and increasing resilience to systemic risk.

Beyond national boundaries, the opportunities for growth have attracted, among others, Spanish banks to Latin America, German banks to Eastern Europe and US banks to Asia. Banking has entered a new world of cross-border coalitions and strategic alliances. For many markets, the influx of foreign banks has helped to broaden both the quality and availability of trade services, fostering an environment of increased competition and enabling the wider application of modern technology infrastructures.

The changing face of trade services

The business of trade itself has been an engine for growth for more than fifty years. One of the most important developments has been the growing participation of developing markets, now accounting for more than one third of world trade (see Figure 1). However, the patterns of integration and growth have been unevenly spread. Foreign direct investment has enabled significant strides to be made in parts of Asia, Central and Eastern Europe and to a lesser extent in Latin America. This is less true in Africa and the Middle East.

At the same time, the nature of the market for trade services is changing globally. The accepted norm of traditional instruments such as letters of credit and collections continues to give way to increased open account, threatening banks with loss of revenue and possible disintermediation. Market focus is less concerned with the management of risk and more compelled towards the provision of working capital finance and the speed and accuracy of information exchange, resulting in the more efficient management of supply chains and cash flows. Many of the systems deployed by banks today do not have the flexibility to cope adequately with the evolving business needs of tomorrow.

The changing dynamics of the competitive landscape have opened up new opportunities for trade banks to build value out of the innovative deployment of new technology, converging business strategy with IT investment. It has been estimated that banks in the Asia Pacific region will invest some $35bn in technology in 2005, a part of which will be dedicated to enhancing applications for trade, cash and treasury. Much of the investment is being driven by expansion in the developing markets of China and India where banks need to develop competitive customer-centric solutions and where speed to market is of key importance. In order to take advantage of such opportunities, software vendors like Misys must be able to deliver competitive solutions based on modern technology architectures, functionally rich, rapidly deployable with the flexibility to support customised local market requirements.

Banking on China

The growth of China and the opening up of India have already emerged as arguably two of the most important economic developments of the 21st century. Already China is overtaking the US as the major trading partner of Japan and it seems only a matter of time before China surpasses the US to become the world’s largest economy. The implications are profound.

Accession to the World Trade Organisation has opened up China’s business development space, attracting both foreign investment and foreign competition. The commercial banking sector grew by more than 20% in 2004. By last November more than 60 foreign banks from almost twenty countries had received permission to establish branch operations in China. More than 200 other banks have opened representative offices.

China’s open door policy is enabling foreign banks to play an increasingly important role in the economy. The choice facing foreign banks is whether to partner with a local bank or to strike out alone. Currently, the extent to which a foreign bank can own a stake in a Chinese bank is restricted to a maximum of 20% for a single foreign investor and 25% for all foreign shareholdings. The early movers and shakers included the big global players like HSBC, which has taken stakes in both Bank of Shanghai and Bank of Communications, and Citibank which invested in Shanghai Pudong Development Bank. Others are now following the same trail. Examples include ING Group, which in March 2005 announced an agreement to purchase a 19.9% stake in Bank of Beijing and Commonwealth Bank of Australia which in April took a similar 19.9% stake in Hangzhou Bank. By the end of 2006, restrictions will be further relaxed and foreign banks will be better able to compete head to head. Local banks increasingly need to think beyond the ability to compete merely on cost and develop more sophisticated strategies and solutions to promote product innovation, brand awareness and compliance with international standards.

Sustained economic growth of between 8% and 9% per annum continues to push China up the technology ladder. For Chinese banks the implementation of modern technology has already become a matter of necessity rather than one of choice.

A new Europe

May 1 2004 was an historic day for the European Union with the adoption of ten new countries and 75 million people. In economic terms the impact of enlargement may be initially insignificant since the new entrants account for no more than 5% of EU GDP. However, EU membership is expected to contribute greatly to economic growth as EU budget-spend enables the implementation of major infrastructure developments. Economies and banking regulations within the region have already been adjusted to comply with EU rules. The next big target will be the adoption of the euro, which for some may come as early as 2007.

A recent study by Bank Austria Creditanstalt concluded that the banking sector in Central and Eastern Europe is likely to develop strongly over the coming years, taking advantage of EU membership as market growth promotes both efficiency and productivity. Banks throughout the accession countries are expected to operate more profitably than their western counterparts. It is likely that the major banks in each of the accession countries will increase their influence and positioning in the banking markets as consolidation increases through mergers and acquisitions.

Although the banking sectors of the accession countries have diverged over the past decade or so, foreign investment, particularly in central Europe and the Baltic States, has already enabled the introduction of new services underpinned by modern technology. For many countries in Eastern Europe, accession to the European Union is also providing a platform for greater economic stability, regulatory reform and increased foreign investment. Many banks have undergone privatisation. As competition intensifies so the demand for more sophisticated products and services deepens, placing increased pressure on margins and forcing banks to work more efficiently to sustain profitability. In order to compete successfully banks here also need to become more flexible both in their management of risk and the timely delivery of new products.

Growth through innovation

Typical of developing markets has been the rapid pace of economic and political reform. This has coincided with rapid changes not only in business practice but also in the underlying technology landscape such that banks must now consider replacement of legacy systems with modern service-oriented architectures. For some it will be a quantum jump from semi automated or perhaps even manual processes to the nirvana of straight-through processing.

Historically, banks trapped in the daily grind of managing operations have tended to look at the use of technology primarily as a means of reducing cost for short-term tactical gain. Today it is more and more apparent that technology has a significant role to play in the strategic planning process, enabling banks to plug the gap between business need and delivery. Implementation of new infrastructures will not only impact IT departments but will also enable banks to re-engineer business processes, ultimately easing the flow of data and access to information resulting in tangible added value to the end user, the customer.

The CEO of one leading bank was quoted recently as saying, “our two key strategies are the customer and the customer”. Clearly, the innovative use of technology will only add value if it is designed to deliver the key attributes of brand – speed, accuracy, value and convenience. The key measure of success for most will be revenue growth. There is scope for every bank to improve its operational efficiency. Leveraging new technology is part and parcel of the game. Banks that fail to recognise the opportunity to transform will not only lag behind the competition but put future revenue growth at risk.

The roadmap to the future

A wise old Chinese proverb says that the man with only one chopstick will go hungry. Acquiring a second chopstick may help the man to eat today but how will he feed his wife and children tomorrow? And what would happen if one of his chopsticks is lost or broken or if someone comes and takes his chopsticks away? In order to survive and be successful, we all need to look ahead, be aware of and anticipate the impact of change and plan accordingly. So where does the road to business value lead for banks in the business of trade? How can these banks win the future and what role should technology play along the way? Here are a few thoughts from a humble software vendor.

Service-oriented architecture

No department in a bank exists in isolation. Integrated systems are needed to provide better financial control and customer relationship management. In a service-oriented architecture, business functions are delivered through loosely coupled components communicating via standard interfaces. As long as the interface itself is preserved, the individual components can be altered or replaced without affecting the overall operation of the system. Testing becomes highly automated and the potential for innovation and higher standards of quality is greatly enhanced. Coupled with open technology standards supporting multiple hardware platforms and databases this architecture can be both modular and integrated using a combination of web services and XML data transfer. This model provides greater flexibility and scalability as well as improved robustness and security.

User interface

The emergence of the service-oriented architecture and web-based technologies demands the use of a browser based ‘thin client’ user interface. This is now the preferred choice in most business environments. Banks that go down the thin client route will not only be able to reduce their hardware acquisition and administration costs but also simplify the deployment of software and upgrades. This approach is particularly well suited to developing markets because of the reduced set up and administration costs.

Alternative operating models

Banks that choose to invest in trade can build scale in order to support growth in business volume. For some, there is an opportunity to leverage scale through centralisation or ‘hubbing’, either on a regional or global basis (see Figure 2). Benchmarking measures will ensure that performance levels are sustained. Systems can be designed in such a way as to support multiple currencies and multiple time zones so that a bank can support its entire pan-Asian and/or pan-European business from a single centre of excellence. In addition, static data items and parameters can be set up centrally and in real time and then deployed locally. Global reporting allows banks to compare revenues by region, customer profitability etc. Operational efficiency is enhanced by having more people in fewer places.

This level of scalability can potentially be exploited further by banks offering to in-source business processing on behalf of other banks on a white label basis. Banks at the opposite end of the spectrum that have no interest in investing in infrastructure but at the same time need to sustain a competitive business offering as part of the corporate suite of services may be looking for opportunities to outsource. Apart from correspondent banks, some third party vendors are able to offer alternative vehicles either in the form of application service providers or hosting facilities. The business rationale for pursuing one or other of these options is a matter of individual choice for the banks concerned.

Streamlined workflow

The profitability of any trade services operation is dependent upon efficient, productive workflow. Advanced workflow management enables the streamlining of the transaction lifecycle. Transactions can be prioritised so that the most urgent are processed first.

Content management

We all know the dependencies that trade has on the negotiation of the underlying documentation. This can often be onerous, costly and time-consuming. The problem can be partly addressed through dematerialisation. In addition, flexible content management will support the integrated scanning, imaging and indexed archiving of critical documentation.

e-enabled trade

Developing markets have been slow to adopt internet technology. Yet trade services are ideally positioned to gain from e-enabled solutions delivered via the internet. In Eastern Europe, we are beginning to see an increase in corporate demand for internet access. There is an opportunity now for banks to extend their role not only by providing a vehicle for initiating transactions and exchanging information but potentially to provide more complete solutions that will assist corporate customers in the management of the supply chain. The electronic exchange of data and communications across a common platform can provide significant business benefit in the form of reduced administrative overhead, re-use of data, increased accuracy and speed of turnaround.

Open-account services

The market dynamics of international trade have changed. Today, it is estimated that more than 70% of all foreign trade is conducted on open account. Trade finance is becoming a commodity business and banks are reinventing their service offerings in order to identify new and effective ways of adding value to the customer. Open account products such as invoice factoring are in more mainstream use, sometimes linked to purchase order processing to support both reconciliation and the finance proposition. At the settlement end, timing is critical so applications must be designed to support an exceptionally high degree of straight-through processing. Rules-based processing provides the flexibility to import data from an external source for automatic mapping and release so that routing instructions, message generation and account postings are all fully integrated.

These are just a few thoughts on where banks can go, using technology that is proven and available today. To be truly successful, however, relies not only on an understanding of the complementary nature of the relationship between business goals and technology solutions. Of critical importance also will be the ability of banks to work in harness with experienced and dependable technology partners to ensure the fulfilment of a long-term vision.