Published: October 10, 2014
Barriers to trade are falling worldwide – most notably in China, where the RMB is becoming widely used among exporters for the first time. Also the regulatory context has deeply changed and a new raft of regulations has come into place after the 2008 banking crisis, mainly focusing on liquidity coverage ratios as well as on the enhancement of RWA requirements. Together, this increasingly globalised and regulated market environment has generated both new challenges and opportunities for global banks such as UniCredit and their corporate clients.
Most significantly, payments to emerging markets are increasingly in local currencies – 18% of external Chinese trade was settled in RMB last year, which is an astonishing leap from the 2% RMB utilisation in 2010. This trend is also evident in other currencies, such as the Thai Baht, which is generating revolutionary changes in the payments landscape.
Corporates will generally look to their local relationship banks to make payments in foreign currencies, although these smaller banks would probably revert to us and rely on “nostro” accounts for the execution of such payments. This duplication of activities would certainly increase the overall cost of the transaction. Meanwhile, some leading global banks are generating combined offerings. For instance, an online client-instructed interface that can generate simultaneous payment and currency conversion instructions is a great benefit to their clients.
Such trends could force many companies towards global banks despite the loss of relationship this may entail, although collaboration between local and major banks could avoid such a fate. Partnerships between local and major banks can help banks reduce their costs (outsourcing the technology and execution costs), increase efficiency and thus enhancing the overall service level provided to the client.
UniCredit has launched for instance PayFX an online platform that allows banks to offer clients foreign currency payments (in 25 euro/currency pairs), while also gaining a revenue stream from the FX rate (offered as a profit share with UniCredit).
One of the implications of the new market environment is that banks need to change the way they work with their customers. While building sustainable relationships with customers has always been central to our strategy at UniCredit, new regulations and new customer demands have led to some important new requirements.
Firstly, Basel III is creating new obligations for banks to hold liquidity coverage ratios that are resulting in some activities becoming more attractive than others. While UniCredit is one of the most stable banks in Europe – in the first half of 2014 our fully-loaded Basel 3 leverage ratio stood at 4.7% – holistic relationships with customers that comprise a variety of complementary activities are becoming more important to us and other banks as a result of Basel III regulation.
Secondly, customer demands are changing in response to the need of balancing geographic expansion, on the one hand, with limitation of counterparty credit risks, on the other. No longer are treasurers seeking a single, global transaction bank. Rather, they are looking for long-term relationships with trusted partners that can support their needs in particular markets or with key operational and financial requirements.[[[PAGE]]]
Banks such as UniCredit have strong relationships with regional banks (as well as documentation such as Know Your Customer certificates in place), and can leverage those relationships to finance a greater number of trade deals and payments. Meanwhile, innovations such as Bank Payment Obligations (BPOs) allow these processes to occur faster and with greater efficiency.
Treasurers and sales, being fully aware of the great advantages of BPOs, should care about extending this understanding to the clients and convince them of the compelling efficiencies related to this new product offer. The first steps in this direction have already been taken by some global banks. For example, UniCredit has promoted a series of workshops aimed at enhancing competencies and creating a consolidated culture on BPOs, especially amongst treasury and sales people.
Certainly, we have been proactive in anticipating and responding to the changing market and regulatory environment, as well as the evolving expectations and demands of our customers. Consequently, we have introduced a variety of new initiatives to enhance the way in which we build and maintain customer relationships.
As with the workshops initiative rolled out to boost BPO adoption, we are placing a greater company-wide emphasis on coaching in order to hear, and understand, our customers’ needs, aspirations and priorities. We seek to understand in detail what concerns the CFO and ensure we fully focus on these issues, whether it is trade settlement efficiency, risk management, or working capital management.
In our broad definition, Supply Chain Finance (SCF) is anything that injects liquidity into, and removes risks from, the supply chain. We think this classification marks a clear departure from the historical view of SCF. It is also deceptive in its simplicity. Previously, SCF was almost exclusively driven by buyers and based on revolving receivables purchase programmes designed to extend days payable outstanding (DPO). This reflected the corporate focus on inventory/supplies optimisation and the safeguarding of liquidity therefore served its purpose.
However, modern supply chains have changed, and the working capital requirements now vary to such a degree that SCF must be more holistic and reflect the needs of suppliers as well as buyers. The result is tangible cost and efficiency gains when employed on either a regular or one-off basis. For the banks offering SCF, such a comprehensive view is a tough ask – but it’s a requirement that must be met if they are to remain relevant to trade.
These initiatives mark a gradual but highly significant shift for UniCredit from a traditional banking role to that of trusted adviser to our customers. This would involve the opportunity to establish a closer contact with the group treasurer and CFO, giving us the opportunity to get a deeper understanding of the client needs and, thus, affirming us as a reference financial counterpart.
Customers are responding positively to these changes. Corporate treasurers have a choice in their banking partners, and are able to select the banks that meet their needs most effectively. At UniCredit, our commitment to long-term, trusted relationships and the ongoing initiatives we have in place to achieve these, are proving a highly attractive proposition for customers.
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