A New Hub for Transaction Banking Innovation?

An Interview with Murali Subramanian, EVP and Head of Transaction Banking, Abu Dhabi Commercial Bank

In this month’s Executive Interview, we feature Murali Subramanian, Head of Transaction Banking at Abu Dhabi Commercial Bank (ADCB). In conversation with Helen Sanders, Editor, Murali discusses some of the innovations that are taking place in the transaction banking space, and how these are reflected in the UAE and more widely across the Middle East.

How are trends in the emergence of new payment technologies being reflected in the Middle East?

The growth of non-traditional payment technologies that we are seeing in some regions, such as mobile, SMS and contactless payments, is largely being driven by demands from the retail banking sector and fulfilled by start-up operations with the flexibility to anticipate and respond to changing demands very quickly. Many of these are then acquired by larger businesses and banks to complement existing solutions and services. However, many of these developments represent more than simply the use of alternative devices for making payments. Instead, they mark a fundamental shift in the concept of a payment. In the past, a payment referred to the combination of messaging and clearing. This link has now been broken, with payments messaging now available via a growing range of methods, and payment engines complementing traditional transaction clearing.

Although innovative payment technologies have been slower to take hold in the Middle East, this is changing. One difference, however, is that there are fewer of the start-ups and venture-capital-funded businesses in Middle East that have typically initiated innovative solutions in Europe, Asia and North America. Consequently, innovation in this region is largely bank-driven at present. However, we are seeing considerable interest in the payments space from potential investors given the size of the market, as well as from institutional and retail users of payment services. This combination of a significant value proposition for innovative payments technologies, and investment potential from major investors such as sovereign wealth funds, positions the UAE in particular as an exciting prospective centre for innovation in financial technology.

What are the implications of this beyond UAE?

UAE’s role as an innovation hub has global as well as regional implications. Innovation developed initially for the Middle Eastern market resonates strongly worldwide. For example, given its close proximity to sanctioned countries, the focus on regulatory compliance is very strong. This means that new payments technology in this region needs to be best-in-class to achieve the convenience and efficiency that users are seeking together with transparency, compliance, robustness and security demanded by senior managers and regulators. While the importance of regulatory compliance may be more acute in the Middle East, compliance is a global issue and therefore has to be integral to innovative payments technology wherever it is developed and deployed. Consequently, UAE has the opportunity, and expertise, to fulfill a pioneering role in achieving global compliance requirements.

Trade is also changing dramatically as a result of globalisation and digitisation. To what extent is this apparent in the Middle East?

Global trade is undoubtedly becoming more complex, which affects counterparties in the Middle East in the same way as every other region. There are a variety of issues that are contributing to this increasing complexity. One is the growing number and expanding geographic reach of commercial counterparties; however, the number of touch-points and complexity of the transactions themselves can also create delays and obstacles. Every installment of a transaction is subject to a variety of risks, so rather than considering transaction risk on a ‘one off’ basis, it becomes a cumulative process, often over long periods. Compliance requirements too can slow the trade process, but this is less significant than with open account transactions as trade transactions are typically supported with more comprehensive documentation compared with open account transactions that are typically dematerialised.

To address growing risks, accelerate transactions and increase efficiency, a growing number of corporations are outsourcing trade document preparation to dedicated providers. By doing so, they gain access to specialist skills and technology, and accelerate trade transactions by minimising errors and delays. As well as facilitating trade, mitigating risk and improving liquidity, companies can redeploy internal resources to processes that add more value to the organisation.

To what extent do you see the use of trade finance instruments being superseded by open account?

With the growth of open account trading, it is tempting to think that the traditional means of financing trade, i.e., bilateral, documentary instruments such as letters of credit, will become increasingly obsolete. However, while open account trading has improved the speed and convenience of transactions, it does not address the issue of counterparty risk and trust, which are key considerations in global trade. Consequently, documentary trade finance instruments continue to play an important role in facilitating international trade. However, all parties to a trade transaction are focused on achieving comparable efficiency to transactions conducted on open account, so there are considerable efforts now being directed towards seamless processing and end-to-end financing.

To what extent is supply chain finance part of treasurers’ toolkit in the Middle East for working capital financing and counterparty risk mitigation?

Supply chain finance is still in its nascent stages in the Middle East, but an interesting development is the emergence of a trade and working capital finance marketplace. For example, for a buyer to offer supplier financing, it needs credit facilities. While traditionally the buyer would approach its bank, it is now able to access third-party platforms that connect buyers to multiple banks and institutional investors through a marketplace. By offering corporates the option to source financing through a marketplace rather than simply through relationship banks, they benefit from greater choice and potentially greater flexibility, but the advantages also extend to banks and institutional investors. Banks that wish to provide this type of financing can do so, while those whose strategic focus is on other areas can do so without damaging customer relationships. Institutional investors gain access to new, high quality investment opportunities.[[[PAGE]]]

How do you think this shift will impact on banks’ offerings in the Middle East?

As corporations gain more choice in the way that they finance their business, and which organisations they select as partners, banks need to refine their focus, leveraging their specific areas of expertise to offer solutions that their customers really need, accompanied with high quality customer services. For example, the ability to give customers access to timely, accurate and complete information in a way that can be harnessed to drive automated processes such as reconciliation is essential. The need for transparency also becomes particularly significant if a bank is providing outsourcing services, in addition to cash management and financing.

How do you see transaction banking evolving in the months and years ahead?

Demand for robust, efficient and secure transaction banking will continue to grow in UAE and more widely in the Middle East, so banks are introducing additional talent, experience and entrepreneurship to build on their existing capabilities. As these banks, particularly regional banks, increase the size and professionalism of their transaction banking teams, we are witnessing a surge in innovative solutions and technology. At the same time, however, regional banks are seeking long-term relationships with customers so innovation needs to be balanced with parallel developments in customer services and relationship management.

The role of transaction banking is also changing. There has perhaps been a tendency to consider transaction banking as a banking division focused only on processing, connectivity and integration. Increasingly, however, customers in the Middle East rely on their transaction bankers as business partners and advisors on a wide range of issues from liquidity strategies and payments and collections efficiency to compliance and risk management.

This combination of transactional and advisory roles is becoming even more important in UAE and other parts of the Middle East due to the prevalence of project finance. Projects have traditionally been financed through long-term loans, in which transaction banking has an important role to play. In addition, however, changes in the way that banks are structuring their balance sheets in line with evolving regulatory requirements, such as Basel III, are prompting borrowers and investors alike to find complementary means of financing projects, to which transaction banking, including supply chain finance, makes a vital contribution.