16 December 2016
Leslie Holstrom speaks to Naveed Sultan, Global Head of Treasury & Trade Solutions, Citi
What are the top three client-side trends in transaction banking that you are focusing on?
In discussions with our clients, there are three interrelated themes that come up frequently regarding their concerns: Risk, Returns, Regulation.
Let’s take risk first. Their top concern is dealing with volatility as global markets adjust to divergent economic growth prospects (US, China, Europe, and so on), as markets anticipate decisions by the Fed and quantitative easing spreads in Europe. Treasury teams are focused on financial risk management strategies and working to make sure that the company can still sell its products at attractive prices (despite Foreign Exchange rate changes).
Second, consider returns. Investors are very focused on optimising their returns on invested capital and CEOs are being thoughtful about capital deployment. How much of corporate cash to put into CapEx, what to return to shareholders, whether to pursue strategic transformation through M&A and divestitures, etc. Treasurers are focused on creating “financial optionality” for their companies.
Third, Treasurers are rightly busy assessing and acting on the implication of changes in the regulatory and tax landscape. I won’t go into the acronyms, but as banks adjust to regulations such as Basel III, corporate treasury practices from short term funding to cash management are being refined. Treasurers are working through these and building deeper linkages with strategic partners. These will impact even very granular matters, such as cash management and cash pooling structures, and multinational treasury departments are assessing the implications and getting ready for changes.
Our response to helping clients analyse and respond to these three themes has formed the basis of our business strategy. From our roots as a transaction service bank we have responded to the contemporary business needs of our clients by positioning ourselves as a business partner leveraging the breadth and depth of our network, as well as the scale of our business enterprise to deliver Advisory, Insights and Solutions as opposed to simple transactional processing services.
What are the top 3 trends that are affecting the banking sector and how are those effects manifesting themselves?
We are at a time of unprecedented change, driven by what we’ve identified as the three defining secular trends of our time.
Globalisation – the increasing connectivity of all the world's nations, economies and markets
Urbanisation – the concentration of people and GDP growth in cities
Digitisation – the transformative power of technological innovations, large and small, not just in the countless efficiencies they create, but also in the opportunity to create new markets, new ecosystems and opportunities
Our approach has been to assist our clients in adapting their operating models to those changes. This we feel is critical to driving our own business planning. It is easy to see how these trends are interrelated and self-reinforcing. Digitisation enables the "shrinking" of the world that fuels globalisation, which in turn creates wealth that drives the rise of urbanisation, where an expanding consumer class buys digital products and invests in technological innovation.
The most pertinent issue for a bank is not only how digitisation is changing the way everyone (businesses, governments, consumers)all handle money, but also how it has led to the creation of new opportunities, has created new markets and created a demand for new tools.
Some of our newest clients have been born from business models that did not exist only a few years ago. Uber, Airbnb, Netflix, etc. were created by the technology innovations of digitisation and telecommunications improvements. Similarly, many of our newest and most value banking services are themselves born from the technologies of mobile computing, machine learning and distributed processing.
One example I can give of such a product innovation is our tool, Payment Risk Analyzer, designed to improve clients' risk controls. It aggregates payments information across a company's countries, currencies, payment methods, payment originators and beneficiaries and via the use of machine learning technology, is able to determine and alert clients when transactions occur that fall outside normal patterns for that company.
How are these client-side and bank-side trends affecting the way you offer and price your services?
As we look at the world today, we see many potential tailwinds, both cyclical and circular. As we've seen in prior cycles, markets today are going through a transition period as the world responds to the prospect of a shifting rate curve and uneven global growth.
Technological innovation will help the bank adapt to shifting market and client demands. We have made it a priority to improve the bank’s technology, which we see as crucial to ensuring transaction services remain a key plank of the bank’s global strategy.
As a bank, we believe that our global footprint and strong corporate relationships will ensure transaction services remain a growing source of revenue in an otherwise challenging period for some of the other businesses.
In the last few years it has been evident that the close management of flows and liquidity positions has become a critically important element and consideration in how our clients are efficiently organising their transaction banking relationships. No longer are throughput capacity, online tools and volume pricing tiers the measure of how a transaction bank is regarded, but rather it is the ability of a banking partner to deliver value back to the client that is expected.
We are moving from being a product provider that prices is services based on the rubric of transaction volume to being a solutions provider delivering core business value to clients, and being compensation on the basis of the value delivered.
In particular, how have you altered your product mix, your pricing and which regions/countries you offer your products? How have these changes been received by your clients?
Our business today reflects an ongoing transformation that began several years ago. In 2010, in the wake of the financial crisis, we began to reshape our franchise for the evolving landscape. We made important investments in our technology infrastructure and we also adapted to shifting regulatory demands by scaling back businesses that were disproportionately affected by Basel III rules.
We then moved to integrate the franchise, better aligning our organisation to serve our target clients in an efficient manner. We started by sharpening our client focus, rationalising our client base to focus on a targeted set of multi-national corporations.
Today our focus is on execution. We continue to deepen our relationships with our target clients, continuing to grow wallet share with a focus on overall client profitability and returns. Citi's global network is a core strength and one that is becoming all but impossible for our peers to replicate in today's economic and regulatory environment. In many ways, where we do business today is a result of how our client’s geographic presence and banking needs have evolved over the past several decades.
We entered many of the markets in our network by leading or following our developed market clients into faster growing regions of the world. Today, a large part of our business is serving their local subsidiaries with cash management, foreign exchange and other day-to-day operating needs. But a growing part of our business is serving large multi-nationals who are domiciled in the emerging markets, helping these rising global competitors as they expand beyond their local markets. Facilitating these large and growing international flows is a unique opportunity for us.
As predicted by industry pundits, there have in fact been significant changes to our competitive landscape. We have seen competitor withdrawals from markets and regions. With bank capital having become more expensive, with client requirement growing higher and with regulatory compliance costs increasing, banks have rightfully needed to make investment allocation decisions based on their own expected return profiles. Banks without scale or competitive differentiation have been forced to shrink their footprints.
We have been fortunate to have built our business over the past 200+ years on the basis of our proprietary network and have built considerable operational scale. The ability to be where our clients need us to be has allowed us to focus on discretionary investments on the introduction of new client facing functionality that benefit our clients.
Are you finding that internal technology issues (silos, legacy systems, unavoidable complexity) create a disadvantage in competing with FinTech companies?
No,not at all. Rather than viewing our infrastructure as a liability we view its scale and industrial strength capacity as a foundational element of building new customised solutions for the benefit of our clients.
In its own way, it is the scale that we have developed over the past 200+ years that is the envy of many FinTechs. The breadth, depth and scale of our network provides us with ‘flow’. This refers both to capital flows of payments, receivables, trade finance transactions but also the flow of the data elements that comprise those transactions. Our ability to analyse that data, to identify trends, to create best practice universe comparisons and to highlight opportunities for efficiency enhancements is exactly what many FinTech firms strive for in their quest for scale. And this is the point where we add value to our clients. Scale becomes a differentiator and a strategic asset.
As digitisation continues to disrupt other traditional industries, reforms are taking place in the financial services sector as well. Generally speaking, we think that digitisation will bring about more opportunities, and enterprises can tap these opportunities to reshape their businesses. At Citi, digitisation is not merely a shallow and superficial trend, but one that can fundamentally transform entire operating systems and underlying processes.
There are measures that we are taking in our institutional business to cater to evolving client preferences. First, on infrastructure and processes, technology is being enhanced to improve clients’ interactive experiences. The process from opening an account to client communication is now digitised and clients are given access to key platforms across various devices for ease of use and convenience. For example, the bank’s CitiDirect platform has recently been launched for use on tablet and mobile devices.
Second, on the digitisation of products and solutions, Citi has many innovation centres around the world and the one in Singapore has successfully driven interactive client engagement as part of its proprietary Citi Interactive Solutions software for treasury and working capital management.
Now that so many FinTech companies have secure, interesting and fast products, what do you see happening to banks in the corporate space?
These days, non-traditional financial institutions, including technology companies, retail payment institutions, telecommunication providers, social media and emerging FinTech enterprises, have gradually solved the issues of information asymmetry, capital demand and supply match and risk sharing via mobile, social, data analysis and cloud computing engines.
Traditional financial institutions are facing the challenges of becoming disintermediated. Financial and non-financial institutions are expanding their investment in emerging enterprises to seek new solutions. Google has invested in 13 finance-dominated projects in 2015, while Intel and Goldman Sachs are actively involved in such investments as well.
Our clients talk to us about their growing interest in mobile for accessing information and executing instructions, an interest in capital and funding management and an increasingly urgent need for effective solutions to address compliance rules. Lower barriers to entry, greater product choice and sophisticated financial services integration platforms have been introduced which are very appealing to clients. While FinTechs and other digital players are not likely to fully displace the full suite of services and broad based nature of core transaction banking business models outright, many entrants are successfully nibbling at the edges with specialised services.
A prediction: how far out do you see FinTech companies being regulated more in line with banks?
The key factor to the success of FinTech innovation is to build an appropriate eco-system with buyers, sellers, government policy and permission and support from regulators. For example, we are now exploring blockchain technology in digital money. As an institutional bank, our goal is to eliminate the discrepancy in the process, enhance customer experience and increase information efficiency and transparency to better mitigate the risk, compliance and management tasks.
Payments are the area where the disruptors are most focused because you don’t necessarily need a banking license to be in the payment space. If you want to take deposits, you need to be a bank. If you want to provide investment advice, you need to be a licensed registered investment adviser. But when you get into the payments space, it’s probably the least onerous area for FinTech to enter. And as such, it’s attracted a lot of people. Combine that with the fact that it’s a big area and more importantly, the most data-rich area. You have people wanting to be in that space not just for the sake of the movement of payments and the financial aspects associated with that, but you have people getting in saying, “We just want the data.” The data is more valuable than the payment movement itself.
From our perspective, we have to make sure that the people who ride the rails of the payment network are held to the same standards that we hold ourselves to as a regulated institution.
Treasurers are now extremely cybersecurity conscious. Is this having any effect on your transaction management business? What about the so-called 'SWIFT hacks'?
The global finance system is a critical infrastructure built on trust and integral to the effective and progressive functioning of society. A structural breach of that trust would have severe economic and social implications. As a bank, our highest priority is to maintain that trust, by protecting our client’s assets (both money and data) and by protecting the integrity of the global financial system. In an increasingly digital and global world, the ways in which we serve and protect our clients is changing significantly, but the underlying need for trust and integrity remains absolute. Our clients look to us to be as current with our cyber security protocols as possible, to share our knowledge and help them be better prepared.
With regard to any of the cyber security matters that have been reported in the Press, this is just a clarion call for all the participants in the financial services sector, from banks to FinTechs to clients themselves, to redouble their efforts around diligence and preparedness.
In a world of exponential technological change, we need a commensurate commitment and investment to stay ahead of the security frontier. New threats will emerge, some we can already imagine, such as the impact of quantum computing on current cryptographic algorithms and some we cannot. Solving these will require coordinated cyber resilience undertaken as a public-private partnership in coordination with our clients.
This is our responsibility as a financial services partner and we accept it and strive to add value in this area.
What are your views on challenger banks? They have traction in the retail market, but what do you expect for the corporate market?
I would go so far as to say it’s a fight for survival in our industry, or at least an inflection point of what our industry is going to be in the future if we don’t embrace innovation and adapt quickly. I think an argument is that without innovating, banks will be relegated to being a utility by our customers, both consumers and corporations.
We must come to work every day understanding that the disruptors are out there working in our space and if we don’t lead from a digital or technological perspective and redefine our industry, the disruptors will. In that case, you get relegated to playing the role of the infrastructure, or the pipes around what is developed. You’ve seen it in Airbnb. You’ve seen it in Uber.
Innovation and technology are really about how we take various frictions, in every sense of the word, out of people’s lives and making their everyday lives easier and better. How do we take time frictions out? How do we take money frictions out? How do we take service-level frictions out? I believe that if we are successful in delivering an unparalleled level of service, built on the industrial strength, volume tested rails of our experience that the large banks will continue to remain relevant and will thrive in the future.