A New Era of Transaction Banking 

Insights from Leading Bankers in Germany

Ahead of Schwab Ley & Greiner’s annual Finanzsymposium, four leading bankers in Germany discussed some of the trends and challenges in transaction banking, moderated by Thomas Schräder, Corporate Treasury Solutions, PwC.

 

Panellists Jan Kupfer, Global Co-head, Global Transaction Banking, UniCredit Group Frank-Oliver Wolf, Global Head of Transaction Banking Sales, Germany, Commerzbank Michael Spiegel, Head of Global Transaction Banking, Deutsche Bank Andreas Bock, Head of Global Liquidity and Cash Management, Germany, HSBC Moderator: Thomas Schräder, Corporate Treasury Solutions, PwC

 

Thomas Schräder, PwC
How do you think your clients’ transaction banking needs have changed over recent years?

Andreas Bock, HSBC
One thing that is clear today is that client relationships, and understanding client requirements at a detailed level, have become more important than ever. Although it may be a transactional business, it is based on relationships, and clients are looking for specific cash and liquidity management solutions, advice and support across the activities and regions in which they do business. This does not only apply to markets that are typically considered more complex, such as China and India, but here in Europe we also have major changes taking place, both politically and economically, such as Brexit, and regulations such as PSD2. Similarly, we are seeing a great deal of change in the United States, and clients are looking for help in navigating these changes. 

Many of our clients here in Germany already have sophisticated treasury operations, whether large, multi-site operations or smaller, leaner treasury functions, but maximising operational efficiency remains important, whilst achieving regulatory compliance and responding to economic, technology and market changes.

Frank-Oliver Wolf, Commerzbank
Regulations, such as anti-money laundering and sanctions screening, will increasingly impact the way that clients consider bank account management, cash management and payments. Furthermore, as these regulations impact both cash and trade, these are likely to move closer together.

Jan Kupfer

Jan Kupfer, UniCredit
International business has become more important for a far wider range of clients than in the past, with a wide range of German Mittelstand (mid-market) companies now expanding overseas, a trend that we expect will continue. 

Risk management has also become more important, not only market and credit risk but also operational risk, particularly fraud. There’s now far more attention from banks and corporates alike on fraud awareness and prevention, and treasurers are looking at how best to protect their business.

Improving operational efficiency and visibility is also a key trend we see with our clients, including a renewed focus on reporting, tracking and cash flow analysis, monitoring debtors and creditors, and understanding their risk and liquidity position more clearly.

Michael Spiegel, Deutsche Bank
Although a wider spectrum of companies are expanding overseas, each company will inevitably have different needs and priorities depending on its treasury maturity as well as its size, business model, etc. So we see quite a difference between the large mid-cap and large corporations that have an established treasury function compared with smaller mid-cap firms. 

The other comment I would make is to differentiate between clients that operate on a B2B or B2C basis, as regulation impacts on these companies in different ways.

I would strongly agree with Jan’s comments on cybersecurity and fraud: this has become a priority for companies of all sizes and in all industries.

 

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Responsibilities for fraud prevention

Thomas Schräder

Thomas Schräder, PwC
What role does a bank play in supporting its clients’ cybersecurity or fraud initiatives? Isn’t it treasurers’ responsibility to protect the assets of the business?

 
Frank-Oliver Wolf, Commerzbank

Firstly, I think that all commercial and financial participants have a shared responsibility to tackle fraud, and for banks this responsibility is also emphasised by the current legal framework. Secondly, banks have a valuable role in supporting clients to identify and implement the right controls and train people in the relevant skills. At the same time, our focus needs to be on sustainably protecting our clients’ data and transactions, which takes an enormous investment in technology and skills.

 
Andreas Bock, HSBC
In this respect, it is quite difficult to separate the client and the bank, particularly bearing in mind the level of interaction between the two. Ultimately, it’s a problem for all of us and we are all affected. Increasing the degree of automation and straight-through processing (STP) is a challenge but it is essential to prevent fraud. Despite the obvious advantages of automation, we still see a large number of manual payments, even amongst larger corporations. These manual payments are far more vulnerable to fraud as they are easy to forge and very difficult to detect. It is therefore the responsibility of treasurers and finance managers, and their banks, to automate end-to-end payment processes as far as possible.

 
Jan Kupfer, UniCredit
Banks’ advisory services are very important in achieving this: smaller Mittelstand clients will not necessarily have a detailed knowledge of fraud techniques so they rely on our expertise and experience. But there is a joint responsibility to strengthen controls, monitoring, automation and education.

 
Michael Spiegel, Deutsche Bank
There are also regional and cultural differences to overcome. Germany, for example, was a little slower than some other countries to adopt dual-factor authentication. While it will happen now with PSD2, there was some resistance. So the advisory function is very important.

As banks, we also need to continue investing heavily in fraud prevention and detection, such as in transaction monitoring tools to establish and monitor patterns of behaviour, and identify anomalies. This is challenging for many reasons, not least due to the impact on client relationships. On one hand, if a fraudulent transaction is sent to a country from which it is difficult to retrieve, this causes problems for clients. On the other, stopping or delaying genuine transactions creates other issues. 

Frank-Oliver Wolf, Commerzbank
A related problem is that some clients are reluctant to come forward and admit that fraud has taken place. But it is obvious that the quicker they inform the bank, the more likely we are to be able to get the stolen money back.

 
Andreas Bock, HSBC
I agree. In addition, identifying payment patterns, as well as acting on them, particularly to retrieve fraudulent payments, is more difficult in some countries than others. This will become even more difficult in the future with the introduction of SEPA instant payments, which will make the window of opportunity to retrieve payments even smaller – or non-existent.

 
Jan Kupfer, UniCredit
It is a challenge to strike the right balance in the discussions with clients: on one hand, innovations in instant payments have significant potential for corporates, but on the other hand, these developments have regulatory and security implications which need to be considered.

 
Andreas Bock, HSBC
Absolutely. If a bank has only seconds to screen a payment, how can it perform anti-money laundering checks, match the payment against behaviour patterns, check on sanctions and terrorism financing in such a short time? Furthermore, under PSD2, if the bank then makes the payment and the client disputes it, the amount needs to be paid back straightaway and then claimed back from the third-party provider. So this is likely to become a growing challenge for banks.

 

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The future of client relationships?

Frank-Oliver Wolf

Frank-Oliver Wolf, Commerzbank
It is also likely to change the way we do KYC (Know Your Customer) monitoring in the future: rather than being a one-off activity when opening an account as it is today, it will become more of a regular review process to understand clients’ business.

 
Michael Spiegel, Deutsche Bank
One possible way of overcoming this is for clients to provide the details of their beneficiaries, so we do the filtering pre-transaction, but this is an evolving discussion and has a number of sensitivities. 

 
Thomas Schräder, PwC
It also becomes more difficult given that the payments industry is becoming more competitive. If the payments processing can be done by different parties, does it make sense for all banks and payment service providers to be performing screening, validation etc., or should this be done elsewhere? Or is there an opportunity for collaboration rather than competition? 

 
Frank-Oliver Wolf, Commerzbank
This leads to a critical question: who owns the client? With new entrants in the financial services market and open application programming interfaces (APIs), there are more and more parties involved. However, as a bank we need to make sure that we continue to own the client relationship, particularly given that we hold the bank account, and have gone through the relevant KYC and bank account management processes.

 
Jan Kupfer, UniCredit
I think the environment has changed, particularly the relationship between banks and financial technology companies (fintechs). Now that many banks have accelerator programmes, innovation labs, agile development programmes etc. I think there is less fear about potential disruption, and more a recognition of the potential to build innovative solutions in close collaboration between banks and selected fintechs and to create new opportunities for clients.

 
Thomas Schräder, PwC
I think there is definitely the potential for change in the ownership of client relationships. Take the example of the automotive sector. Today, a car company may source parts and design innovations from a variety of sources, but ultimately, the car company owns the customer relationship. In five or ten years, this may not be the case, as companies outside the sector, such as Google or Apple, leverage the data they have on their clients to design vehicles exactly to specification, so the car company’s role is more of a production house and may no longer own the relationship. Could this happen in the transaction banking space? Clients need to move money, but could these services simply become commodity provided by the bank in the background, while the relationship is with the fintech or other company that provides the added value services, such as payment filtering etc.?

 
Michael Spiegel, Deutsche Bank
To some extent, this already happens; it depends on how you define a client. We see fintechs in four main categories. First, they can themselves become clients, particularly the established, larger payment service providers, who have taken market share from the retail banks. In this case, they own the client, but we process large volumes of their client transactions. Second, as competitors. Third, as partners. This is a big opportunity, but it’s not always easy to back the winners, so partnering at the right stage of development is essential. Fourth are the enablers, who can complement and enhance banking services rather than eroding or disrupting them. 

 

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Andreas Bock

Andreas Bock, HSBC
I would perhaps be less optimistic, particularly in relation to retail customers. You mention that payment services providers are already taking market share from retail banking, and with the growth of third party payment tools, such as Apple Pay, WeChat in China, etc., what is the future for retail banking relationships? For corporate and institutional customers, I would say yes, we do still own the relationship, but there is the challenge that there is no single bank offering a complete range of services globally. As a result, corporations have multiple banking partners, and the issue of wallet-sharing emerges. Banks would not be in a position to finance many of their clients without ancillary business such as transaction banking, so there is likely to be an impact if corporates seek these services elsewhere.

 
Michael Spiegel, Deutsche Bank
I think that the bilateral bank-to-client relationship is a thing of the past. Now we are seeing a new ecosystem develop which includes other banks and third party providers such as technology vendors. As an industry, we do not have a good track record in collaboration: it seems to take an unfeasibly long time to agree payment standards and formats, for example.

 
Frank-Oliver Wolf, Commerzbank
I think today’s treasurers still value the trusted relationship with the bank, and they recognise our core competencies. The younger generation coming through, however, has a different approach, so they will make their decisions based on different criteria. For example, I read a survey recently which said that 70% of the millennials ‘prefer to visit a dentist than a bank branch’, which will have an impact on the way that banks build brand recognition and trust in the future, not only in retail banking, but in corporate banking too.

 
Andreas Bock, HSBC
This is a very fair point, and it will be interesting to see how the next ten years play out. By that time, some fintechs will have built up more of a track record and proved their credibility, but any failures could cause people to rethink where they place their trust. As a bank, failure is not an option, which applies equally to fintech services embedded into banks’ solution offering. I would hope that the younger generation of treasurers will still value safety, security and the assurance of a regulated partner, rather than simply focusing on increasing payment speed and greater convenience. 

 

A new generation of innovation

Jan Kupfer, UniCredit
Trust is crucial, but we also need to build, or partner with companies that can provide the convenient, transparent tools that treasurers require for reporting, tracking and transaction management. It is not just the transaction that matters, but all the information that surrounds it. In addition, the regulatory burden for corporate treasuries is increasing, just as it is for banks, so they are looking for tools to ease this burden wherever possible, and banks have a role to play here.

One of the changes inspired by the current generation of fintechs is a new approach to technology projects. In the past, a payment project was often long, costly, cumbersome and complex. Today, expectations are higher, development lifecycles have accelerated, and the number of stakeholders has increased, particularly given the regulations surrounding payments. So the ecosystem concept is a valuable one – both within a bank and in a wider sense – to adopt a holistic view to find new ways to innovate while sharing accountability and breaking down the product siloes of the past.

 
Andreas Bock, HSBC
One of the problems with innovation for banks is that so many investment dollars are tied up in regulatory compliance and the technology required to achieve this, which limits the capacity for other more client-centric developments. Fintechs are not regulated so they do not have these overheads, nor the same reputational risk in case of failure.

 
Frank-Oliver Wolf, Commerzbank
Another problem is that although many organisations appreciate the potential value of innovation in terms of efficiency, convenience, control etc. some are not willing to invest or change without a quantifiable value.

 

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Jan Kupfer, UniCredit
This is an issue we have here in Germany. Use of cash, for example, has hardly changed over the past five years: Germans have an average of €103.52 in their pockets, despite the opportunities that exist for electronic payments. In countries such as Sweden, cash is barely used at all. 

 
Thomas Schräder, PwC
In parts of Africa, you don’t have a bank account, but cash is still being replaced, in this instance with smartphone wallets. What’s the likelihood of truly cashless societies in the future?

 
Andreas Bock, HSBC
It will take time, but even in countries like Germany that prefer cash, eCommerce is driving greater use of electronic payment methods and cards, so ultimately, yes, this could happen. What I think is interesting is whether we will need not cash but bank accounts in the future.

 
Michael Spiegel, Deutsche Bank
From a corporate perspective, I don’t see this is as a risk, and there will continue to be an important role for banks in the ecosystem, even though banking is changing. As Jan mentioned, in some countries such as the Nordics, cash has almost disappeared. In the UK, contactless payments have grown very quickly. The limit on the growth of electronic retail payments is likely to be security, such as the fraudulent use of contactless technology. 

Andreas Bock, HSBC
Another limitation is internet access – online banking and electronic payments are not an option in areas that don’t have access to high speed, reliable internet, which remains a problem in parts of Germany, for example. There’s also a demographic issue: older generations are more likely to prefer using cash and branch banking, and with people living longer, this will continue for the medium term. Rather than traditional payment and banking methods dying out, therefore, I simply see new payment methods being added, and people will choose what method they prefer.

 

Innovations in treasury

Thomas Schräder, PwC
Talking about payment methods, we have seen corporations use multilateral netting for some time, and more recently payments and collections on behalf of (POBO and COBO). Alongside these, a recent innovation that is coming through now is virtual accounts. What potential do you see here?

 
Jan Kupfer, UniCredit
Virtual accounts are not a new payment method, they were really introduced to meet clients’ reconciliation needs: with a large volume of flows coming into one account, treasurers need a way of identifying and reconciling these flows. The potential for virtual accounts extends significantly beyond in-house banking, such as by combining it with the Internet of Things. In doing so, it creates an entirely new value proposition to facilitate new and innovative business models.

Michael Spiegel

Michael Spiegel, Deutsche Bank
For a multinational with 500 accounts across 20 banks or so, on average, techniques that can help to rationalise banks, accounts and number of external flows are very valuable. Furthermore, techniques such as POBO as part of a centralised payments and in-house bank environment help companies to achieve consistent payment processing and controls. However, the extension of these techniques to virtual accounts also marks the next step in type of service that corporate treasurers need: not just transaction processing, but also the related data analysis. This is true not only of payments, but also other areas such as FX. For example, one of our partner companies, FireApps, looks at companies' FX exposure and identifies trends and issues through intelligent analysis, which can really help drive improvements. So I think data analytics is the key here.

 
Frank-Oliver Wolf, Commerzbank
As you say, it’s not just payments where innovation is taking place. One key area for the future is to accelerate account opening, and another is trade finance, which is typically paper-based. 

 
Jan Kupfer, UniCredit
There are already trade finance initiatives under way, and here we are seeing a lot of collaboration taking place. For example, we are working with six other banks to develop a shared blockchain platform called Digital Trade Chain that aims to make domestic and cross-border commerce easier for European small and medium-size companies. This will also help to bring together cash and trade with better tracking of goods and payments.

 

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A new era for payments

Thomas Schräder, PwC
An innovation that is taking shape now, for launch later this year is SEPA instant payments. Are these likely to prove to be innovation for innovation’s sake, or do they solve a genuine business problem?

 
Frank-Oliver Wolf, Commerzbank
Honestly, none of my clients has asked for instant payments, but now they’re coming and we have to deal with it. They do not offer significant value to most corporates, it’s more of an issue for retail banking. Given the discussions we’ve already had about limited investment capacity, and huge requirements in areas such as compliance and security, instant payments will reduce this capacity further.

 
Andreas Bock, HSBC
I think in general terms, the strongest use case for corporates will be in their engagements with retail customers, such as car sales or other transactions where you need to settle immediately, but there aren’t many of these. In a B2B business, most payments are processed in batches, and instant payments offer little value. Instant payments already exist in a number of markets, with strong retail adoption, but they have not made a significant impact in the corporate banking space. 

 
Jan Kupfer, UniCredit
It also raises some important questions for some industries. For insurance companies, for example, instant payments mean that insurance cover should start immediately, which has an impact on internal systems. 

 
Andreas Bock, HSBC
Similarly, while banks are having to invest in instant payments, corporates will have to invest too, as their systems are less likely to be equipped at this stage. There are liquidity issues too, as payments will likely be able to settle on current non-business days. 

 
Michael Spiegel, Deutsche Bank
Absolutely, and there are also issues on standards, particularly given that this is a global marketplace, not a series of isolated markets. It’s difficult enough to agree standards within the Eurozone, let alone beyond that. This is a particular challenge for banks that operate globally – or even regionally.

 

Evolving banking strategies

Thomas Schräder, PwC
This leads to another interesting question, namely what is your overall strategy as a bank? To be a global bank? Or a local or regional bank?

 
Andreas Bock, HSBC
I think that’s become a more important topic recently. From a corporate perspective, globalisation is still a theme. In the financial world, it is not. In Europe we have differences, particularly now with Brexit, and in Asia and other regions, the distinctions between countries are even greater. Regulation is increasing, and with that, even regional financial structures, let alone global ones, become more difficult. 

For us, and probably other banks too, we operate in a large number of countries around the world. Trade corridors are changing, with more intra-Asia trade for example, which may reduce reliance on cross-regional trade with Europe, and this will have an impact on what banking services clients need, and in which locations and trade corridors.

While connecting countries and regions will continue to be important in banking, there also needs to be more emphasis on banking within each region and supporting needs in local markets, particularly influenced by regulation and changing trade patterns.

 
Michael Spiegel, Deutsche Bank
I agree. We're committed to remaining a network bank, and we continue to focus on providing network services to our corporate clients. This is an ongoing demand amongst our clients, not only large multinationals, but the mid-cap clients too, who want to work with banks they trust as they expand internationally.

As they do so, there is undoubtedly a need for more localised solutions, but without compromising on the efficiency, control and visibility offered through centralisation. Consistent solutions, communication and standards are also key to achieving this balance of local, global and regional.

 

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Frank-Oliver Wolf, Commerzbank
Inevitably not every bank can be equally strong in every market, so we all make choices on where we direct our resources and investment. For Commerzbank, our focus is on Europe based on our home market in Germany. We are very strong in cash and trade in the regions in which we operate, but we are realistic that we cannot be everywhere and do everything.

 
Jan Kupfer, UniCredit
We have successfully concluded a major capital increase and are positioned as a strong pan-European group with a simple commercial banking model and a fully plugged-in Corporate & Investment Bank delivering our unique Western, Central and Eastern European network to our extensive client franchise. In Global Transaction Banking, we offer local expertise as well as international reach to support our clients in their international growth.

 
Michael Spiegel, Deutsche Bank
I think the question of bank strategy is inextricably linked to the issues of innovation and regulation that we have discussed. As both innovation and regulation march on, it will be interesting to see how banks’ footprint, and indeed the shape of banking, will evolve over the next five to ten years.