Published: October 29, 2012
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.
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.
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.[[[PAGE]]]
Newer and more flexible transactional FX services that offer higher levels of transparency can also have some beneficial side-effects for those who are keen to wring the last drops of liquidity from every aspect of their operations. Pricing structures and costs that may previously have been more complex can be more clearly identified. In turn, this can enable a clearer distribution of benefits. For example, one aspect that leading transactional FX service providers have sought to highlight is the opportunity to access market leading FX rates to maintain margins whilst still pricing competitively to end customers. Such opportunities can be a powerful incentive for a financial institution to adopt such a service.
Data continues to be a highly valuable commodity to banks, financial institutions and their clients. The availability of accurate data and the way that it is used can also have a significant effect on the perception of an organisation by its clients. Older transactional FX practices that might not enable a bank to easily provide timely and relevant information to its clients are being superseded by new solutions in which a sending bank can facilitate access to a vast array of reporting information.
The gradual erosion of country-specific idiosyncrasies and the implementation of more consistent cross-border regulations are promoting simplification at a market level. Within the operations of many financial institutions, equivalent moves are taking place. The rationalisation of account structures can help to optimise liquidity. Easier access to FX markets help to reduce operational risk and account maintenance costs. In particular, transactional FX services that can allow a financial institution to bring FX further up the value chain can be particularly attractive.
It’s clear that despite increasing market homogeneity, maintaining funds denominated in a wide range of currencies can incur significant risk. Services that can help to offset or reduce such risks are likely to prove increasingly attractive and gain traction. For example, RBS GlobalXChange can facilitate the execution of payments in multiple currencies without the need to hold accounts in those currencies. This can help to promote a more streamlined and cost-effective cross-currency management approach. If the service enables a financial institution to understand the FX rate upfront as well, it can help to mitigate FX settlement and currency devaluation risks. It also offers the chance to extend the FX offering to a financial institution’s own clients without the need for investment.
The drive towards more efficient processes can also help to identify additional sources of revenue. For example, the customers of many financial institutions send substantial volumes of cross-border payments where the currency they send is not what’s needed by the beneficiary. Some of the more flexible transactional FX services available, such as RBS Global Payment Conversion, allow such financial institutions to determine the currency required and ensure access to competitive FX rates. In addition such services can provide end-to-end transparency and consistently good FX rates for the benefit of both the sending client and the beneficiary.
The maintenance of bank accounts in multiple currencies while paying for the processing of international wires can be an onerous and expensive commitment. At RBS, we believe that demand will continue to increase for transactional FX services that allow financial institutions to process such bulk payments from a single debit account denominated in their chosen currency through the most efficient and cost-effective means possible. Accompanying benefits such as true batch processing, reduced settlement costs, simplified account structures and reconciliation can all help to provide greater visibility and control of cash flows and FX.
Demand for greater efficiency is in part being driven by the desire to simplify the way in which business is transacted across multiple regions. Using SWIFT-based connectivity can be an effective way of achieving this – in part, solutions such as the fully automated RBS FI GlobalAccount use it because it provides a financial institution with the potential to leverage existing infrastructure. Using a SWIFT-based network can also facilitate the management of client enquiries by tracking all transaction information. These benefits support the key attractions of solutions such as FI GlobalAccount which are to extend reach through access to a vast range of currencies and to capture cost savings that arise because there is no need to maintain actual nostro accounts to gain access to those currencies.
However, compliance with current practices and legislation may not be enough. Transactional FX trends over the longer term are not only likely to take account of the existing regulatory landscape but the expected market changes due for implementation over the next few years. This offers service providers an opportunity to prepare for such trends and encourages the adoption of newer initiatives through the implementation of innovative products and services in an environment where simplicity, control and automation are likely to prevail.
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