Trends in Transactional FX
by Paul Thwaite, Global Head of Financial Institutions, International Banking, RBS
The ability to provide efficient transactional FX services – such as international cross-currency payments – in a variety of changing markets can be a challenge. Reducing costs, increasing efficiency and providing products and services that are highly attractive to prospective clients are all options that can be explored by financial institutions in the quest to retain market share or expand their operations.
For many financial institutions though, adding greater simplicity, automation, control or flexibility can help to provide significant and welcome operational benefits. In an environment of regulatory alignment and integration across global markets, there continues to be robust demand for services that can generate such gains and are easy to implement.
Assessing the market
Any thorough assessment of a business against its competitors will take into account the prospects of the market as a whole and the ability of the company to capitalise on opportunities within that market. As a result, it’s essential to understand the factors which may support such expansion and those which might restrict it. A central theme that is affecting the day-to-day considerations of financial institutions across many of the markets is a need for better transparency and clarity. Authorities in many countries are increasingly accepting of the positive effects that inculcating a more rigid legal and regulatory framework can have on the market as a whole.
This theme has been driven for some time by consumer legislation that in turn is shaping the products and services offered by banks and financial institutions. Action by governments to apply similar transparency requirements to business-to-business relationships means that many financial services sectors are becoming more aligned.
Current demand for services that can help to reduce administrative costs or improve accuracy remains strong and the burgeoning trend towards a fully automated and electronic environment continues. Advances in technology and online capabilities are also able to support greater transparency since automated processes are often more consistent than their manual equivalents and offer the potential for deeper analysis through more consistent reporting processes.
Nevertheless, the transition is likely to be gradual. Compliance with new regulations can be resource-intensive. As a result, in a challenging market gaining board-level support for the early adoption of practices that will become future regulatory requirements may not be a priority for all financial institutions. However, those that understand their clients well may already know that putting off such a move in the short term could be counter-productive over the longer term.
The world’s largest single international market is a good case in point. Adoption of the EU’s Single Euro Payments Area (SEPA) Credit Transfer and SEPA Direct Debit services is already gathering momentum and the regulatory migration end-date of February 2014 will only serve to give forward-planning companies the ability to future-proof their operations – and allow well-prepared financial institutions with appropriate service solutions the chance to gain market share. With the EU / EEA region extending to non-euro countries, this opportunity includes the provision of transactional FX services.
Transactional FX market changes
It’s common for the relatively long periods between the announcement by authorities of impending legislation and the actual implementation date to present forward-looking companies with an excellent opportunity to streamline their operations in advance of any changes and potentially gain significant ground on their peers.
The transactional FX market is a good example of this. The push for greater transparency by authorities has ensured that many financial institutions are now fully aware of the need to provide a suite of transactional banking services that are highly transparent while also offering the ability to generate competitive returns. Finding the most efficient way to facilitate international cross-currency cash flows – whether in relation to the servicing of a corporate or a retail client base – continues to be a focus for many financial institutions.
It’s clear that this market will continue to change. Service providers as well as users are beginning to seek off-the-shelf solutions that can be tailored to achieve the best results for all parties. Historically, traditional transactional FX solutions have been relatively inflexible. Standard limits, broadly applied pricing structures and an inability to be customised to suit the needs of individual users can mean that efficiency can sometimes be compromised. Such solutions can also enforce a more rigid format on a business that may not necessarily be in-line with its chosen corporate strategy.