FX: Is the Clock Ticking for Bank Service Bundling?

FX fees have often been difficult to assess as part of a traditionally bundled bank service agreement. But with transparency firmly on the agenda for corporate stakeholders, Eric Huttman, CEO, MillTechFX, believes that both banks and corporates now have the means to benefit from a more open approach to FX.

For some treasurers, there is value in taking a price hit on FX fees with their bank if it means other services are more readily accessible as part of a bundle. But many do not know precisely what individual services they are paying for within their banking bundle. If those fees were known, their ready agreement might not be so forthcoming.

Such insight is now possible. As a result, the status quo appears to be changing. The prevalence of bank service bundling is being challenged, and the momentum is shifting towards more transparency over component costs, an outcome made possible by a blend of regulation, technology, and corporate stakeholder desire for stronger governance.

Historically, FX has been particularly prone to being aggregated with other key services – notably lending facilities – and corporates have often felt unable to challenge the value of the FX component for fear of upsetting the equilibrium. But this anxiety is misplaced, says Huttman. Indeed, it is, he feels, entirely right and proper to assess and question any aspect of a package that is not delivering acceptable value. The fact that it is now relatively easy to do so for FX makes it almost a treasury obligation.

It’s important here to point out that MillTechFX is an FX-as-a-service platform for corporates to access multi-bank FX rates via an independent marketplace. Cries of ‘partisan’ may seem obvious, but as its CEO, Huttman is not, in fact, bound to side with the client and propagate unrest. The firm is neither a market maker nor broker, but an agent or access point to the wholesale market.

Measure then change

With this in mind, Huttman says the starting point for this exploration is ‘not why do corporates accept a price hit on FX?’, but ‘what is that price hit?’. “Corporates will rarely see a line item on their income statement detailing their FX costs. But once they can quantify that cost, they will be in a position to make an informed decision about it,” he explains. “While some will still be happy to pay more for FX within their bundle once they have full transparency, many will not be comfortable with those fees.”

The first part of the process, therefore, involves uncovering the hidden costs of FX. This can begin with diagnostic transaction cost analysis (TCA). Comparing actual FX execution data with an independent mid-market price helps with quantification, then treasury has to take a decision using this output data to try to reduce its costs or to accept them. This is where a platform such as MillTechFX makes life easier, says Huttman.

With around 15 FX banks on its books to date, and the ability to onboard corporate clients via the Agency ISDA (International Swaps and Derivatives Association) framework that essentially facilitates a one-to-many administration process, he says treasurers can leverage MillTechFX for cost savings.

It’s likely to be not their only driver: with the recent loss of faith in the financial sector as a few US banks collapsing under the weight of their own bad deals sent shockwaves around the world, treasury concerns about credit risk have re-emerged, and diversification of credit relationships is back on the agenda.

In MillTechFX’s recent North America CFO FX Report 2023: The intensifying FX challenges for corporates, 88% of North American corporates surveyed said they are exploring diversifying their FX counterparties following the recent banking crisis (see box at the end of this blog for sample size details and further stats).

Of course, achieving FX best execution typically means accessing multiple price providers, and an agency platform such as MillTechFX offers users wider market access. Having multiple pricing sources is an advantage because at any given time it might be a different bank that has the best FX price. But by extension, wider market access also facilitates credit diversity. Two birds are killed with one stone.

It seems like an obvious opportunity to explore, but the nervousness felt by treasurers unwilling to upset an existing primary banking relationship by pushing for FX best execution via an agency platform is understandable, if largely misplaced, says Huttman.

“It is something corporates are concerned about, and I recognise that, which is why I believe that, for some corporates, reduction of cost is not their main driver. They want to preserve their banking relationship because they’ve got a number of products and they are happy to pay more for their FX to keep the peace. But I believe that they should be doing so only with eyes wide open, supported by TCA. This is the critical starting point for making informed decisions and deciding priorities.”

Pockets of natural resistance aside, Huttman believes that the financial markets are facing an “inexorable trend” towards more transparency, and that the notion of the universal bank – one bank for everything – is waning. “It’s why corporates are increasingly comfortable with having different pieces of their treasury serviced by different providers,” he states. But he accepts that this will gain traction only if these separate elements are integrated via technology into a centralised ecosystem, “because treasurers have no desire to increase their operational burden”.

Transparency and efficiency

When it comes to “not adding to their headaches”, Huttman says treasurers will already know that the prevalence of legacy systems within many organisations means that FX trades are often both time consuming and risk laden. The North America CFO FX Report 2023 reveals that some 40% of respondents send or upload files manually, 35% rely on phone, and 34% use email to instruct financial transactions.

Having a single platform that can plug directly into a treasury core system will provide additional operational control over data, which he notes for many treasurers “will be as important as cost reduction”. But while a change of system can be unnerving, he suggests that an integrated digital platform could “empower the treasurer” to make more informed decisions. It would certainly make navigating FX optimisation easier.

With the 2023 survey showing that half of corporates are planning on increasing their hedging ratio over the next 12 months, and 43% are planning on lengthening their hedge window, he suggests now is surely an appropriate time to improve upon spreadsheet-based analysis and manual communication.

At an administrative level, a corporate seeking credit diversity within its FX trading may find that setting up multiple individual bank lines can be quite challenging, notes Huttman. He warns that the ISDA negotiation process alone is “not an easy task”. By consolidating clients under the ISDAs it has with each of its banking partners, Huttman believes that “it’s a benefit of MillTechFX that treasurers’ operational burden is reduced meaningfully both in terms of onboarding and on an ongoing basis”.

It’s also the case with a multi-bank platform that inherent provider optionality enables treasurers to more efficiently manage their day-to-day policy obligations, such as counterparty exposure limits. This is an important point at the level of ESG compliance too, Huttman noting that the ‘G’ –Governance – element is often the poor relation. He feels this is changing.

“There is increasing demand from senior business stakeholders, at the level of investor or board, for example, to establish greater transparency and accountability. This is about having the policy, processes and systems – the governance – in place to ensure it is measured and demonstrated at all times, because for some stakeholders too, it is more important than cost.”

Bank benefit

It is worth noting that TCA is a requirement under the best execution obligations of Markets in Financial Instruments Directive 2014 (MiFID II), says Huttman. This regulation impacts FIs in the investment and trading space, including banks, but is not applicable to corporates. However, although the actual cost to a bank of servicing a client for FX only is uncertain, TCA data enables companies such as MillTechFX to understand the cost savings it can deliver to its clients on an aggregate basis.

Noting that the cost base of banks “remains very high”, Huttman suggests that when corporates are able to onboard via a centralised platform, it’s more efficient for their banks too “because they do not need the extra resources to manage those clients, which lowers their cost-to-service on an ongoing basis”.

New momentum

Banks can clearly benefit from the process and cost efficiencies of a multi-bank FX platform, just as corporates benefit in several ways from having multiple FX pricing sources. But is this enough to sound the death knell for the bundling of bank services?

For Huttman, while bundling clearly still exists, he feels its momentum is dwindling. “The direction of travel is now very much towards less bundling,” he comments, adding that this movement is being guided by an increase in transparency over the component costs within the bundle.

As transparency increases, so treasurers will be better able to make more informed decisions about the underlying cost components of their bundle. In some cases, they may well decide that, all things considered, these costs are acceptable. Others may deem certain individual costs to be excessive and choose a best-of-breed approach for those components, but now are able to take action from a position of knowledge. Indeed, where once that approach may have been challenging on many fronts, the difference now, says Huttman, is that “treasurers can more easily independently access the different pieces of their bundles”.

With many more non-bank credit providers only too happy to take on those elements, it may suggest that banks need to sharpen up their act as far as the pricing of bundling is concerned. But with businesses such as MillTechFX mediating between banks and corporates, and the corporate desire to shift towards digitalisation and automation very much in evidence – driven in part by many of the issues referred to above, especially cost and credit diversification – what is more likely is that a new kind of relationship will develop. This will be based on treasurers having more insight and control over the services they use, and their banks having a greater understanding of, and the will to service, their needs.