Deutsche Bank Interview
16 December 2016
Leslie Holstrom speaks to Michael Spiegel, Head of Trade Finance & Cash Management Corporates, Deutsche Bank
What are the top three client-side trends in transaction banking that you are focusing on?
There is clearly one trend that has impacted our business for years, technology. That continues to remain a game-changer in bank/corporate relationships. As a consequence: banks need to start thinking of themselves as an applied technology provider. This means expanding their digital product suite and thinking more in terms of offering a seamless end-to-end customer experience. However, this also requires banks to take a closer look at their underlying IT platforms.
It is certainly not possible to single out one main “disruptive” theme. There are numerous digital themes and new innovations which we need to consider. The impact some of the digital themes, such as API, Cloud and FinTech, will have on our business models is best assessed when looking at the combined effect.
In addition, our clients are pushing for operational efficiencies, which we are addressing at various levels. At an account level, clients want to reduce the number of accounts and we are offering OBO structures and/or virtual accounts in order to cut indirect costs and improve risk, control and liquidity objectives.
From a flow level, clients are increasingly looking to automate more FX and payment, processes and we offer solutions in this area. Finally, from a balance sheet perspective, there is increased demand from Treasurers to find creative ways to structure off-balance sheet financings for trade flows. Again, we are working closely with our clients to develop innovative and feasible solutions that help to achieve these targets.
What are the top 3 trends that are affecting the banking sector and how are those effects manifesting themselves?
Banks will certainly need to review their approach to technology. We will need to think more like a technology company. In order to do so, we need to modify our TECH-DNA. Every discussion we now have, be it with clients, regulators or even within the bank, is about technology. Compliance is about technology, audit is about technology and products are about technology.
Secondly, FinTechs are not necessarily competitors. They have different roles in the financial service ecosystem as partners, clients and competitors.
Moreover, advantages don’t solely lie with FinTechs as their growth in the B2B client segment is still limited. They still lack the combination of scale, global reach, regulatory compliance, processing infrastructure, financing capabilities and client knowledge base required for long-term success in this market.
One aspect I want specifically to address is anti-financial crime. Anti-money laundering, sanctions, embargos are key in this respect. Particularly given the more difficult geo-political environment, this has become a more prominent and important area and applying the best industry standard in this field is just not good enough. This is for example reflected in an increased importance of the KYC (“Know your Customer”) process and the need to not only know our client, but also increasingly our client’s clients. While our clients have selectively expressed concerns around our more rigorous approach and specific processes, they do understand the need and see the benefit of working with a safe and sound provider.
How are these client-side and bank-side trends affecting the way you offer and price your services?
Across Europe, when it comes to pricing, we also have to consider the many regulatory changes taking place. We also have to identify the value of the service and asset being provided. We have a balanced approach to identifying the use of cash within our client solutions regarding the core product being provided. Deutsche Bank and its clients are working in partnership to identify all the costs in the value chain and provide transparency to our clients and partners. Our other major consideration, is to shift our revenue mix more towards fee-based pricing.
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?
One of the biggest changes has been the optimisation of our client relationships. We now pay much more attention to a narrower group of clients. Having spoken with many, they seem to understand the challenges banks are currently facing and appreciate our transparency. We now place much more emphasis on the relationships we keep with our core clients and to delivering more value in terms of deepening wallet with existing clients.
Are you finding that internal technology issues (silos, legacy systems, unavoidable complexity) create a disadvantage in competing with FinTech companies?
Banks are recognising that if they want to continue to deliver valuable, market-leading solutions to their clients, they need to be more flexible in terms of the way they operate, how they develop and rollout out new products in terms of client adoption, KYC and the level of attention on straight though processing.
We have to remember that transaction processing is a commodity. Incumbent Banks are at risk of losing the battle for the retail client space to FinTechs, with improved product interconnectivity that unbundle the traditional model of universal retail banking at a better cost and convenience.
Going forward, collaboration between incumbents and new players will play a key role. By exploring strategic partnerships, traditional banking providers and new innovators can together create long-term success and revolutionise the payments market and wider financial sector for the benefit of all.
Now that so many FinTech companies have secure, interesting and fast products, what do you see happening to banks in the corporate space?
One aspect which has been raised by many is “data and trust”. Banks are in a trust and client business. They are highly regulated on various levels. Cost of failure is larger for banks than for FinTechs, hence corporate clients might prefer to put their data and, ultimately, trust into banks.
A prediction: How far out do you see FinTech companies being regulated more in line with banks?
Many FinTechs have realised that they cannot repeal the laws of gravity and regulatory compliance.
Although regulators try to support innovation and the broader FinTech ecosystem via , for example, regulatory sandboxes for initial testing, regularity scrutiny is likely to increase globally and will require FinTechs to have deep investment pockets to stay in the game. KYC is just one issue which is likely to keep many FinTechs busy.
Once we see any high profile data breaches or fraud with the big brand FinTechs, regulators will start expanding regulation on security and data protection from banks to FinTechs. Wise regulation is needed to allow innovation to develop in financial services, for both FinTechs and banks.
Treasurers are now extremely cybersecurity conscious. Is this having any effect on your transaction management business? What about the so-called 'SWIFT hacks'?
We’ve received many client queries on this topic and the industry has clearly put this at the top of their agenda. We all have substantially increased security on all levels. There is a lot of information sharing between all parties involved as it relates to connectivity and payment best practice since volume and magnitude of cyber risks underscore the need for collaboration among banks, tech providers, and clients. Therefore, generally all market participants need to jointly focus on this important topic as criminals tend to target the weakest link in the chain, or in our case a network like SWIFT. Required measures include investments in technology but also very simple things like the proper management of access rights and correspondent data.