16 December 2016
Leslie Holstrom speaks to Mark Troutman, Head of Corporate Sales, Global Liquidity & Cash Management, HSBC
What are the top three client-side trends in transaction banking that you are focusing on?
The three key customer trends we are focusing on are international connectivity, digitisation and changing regulations.
International growth – With globalisation, corporates are looking to tap into increasing growth in sales from rapidly developing economies as well as in the more developed markets. At the same time, SME and mid-market clients in developed markets are also increasingly seeing their future growth coming from international expansion. Banks therefore need to grow their capability to help their customers connect around the world.
Increased efficiency – In light of tough economic conditions, corporates are increasingly looking at the efficiency of their treasury operations and how they can utilise available cash more effectively. Many are looking to standardise or centralise treasury practices across countries, while also streamlining processes in accounts payable and collections to reduce company cash tied up in Order to Cash and Purchase to Pay cycles to reduce working capital.
Liquidity management – At a time when interest rates remain low, cash holdings are at an all-time high and regulators are demanding more transparency over investment decision-making, the need to better optimise liquidity is more critical than ever for corporates. Managing cash and liquidity across borders, across a variety of currencies can be complex and time-intensive, so corporates are looking increasingly to automate this activity, enhance controls and evidence compliance with their investment mandate.
What are the top 3 trends that are affecting the banking sector and how are those effects manifesting themselves?
Compliance and risk management – An area of focus across the world is preventing financial crime. Regulations have been updated to ensure criminals cannot exploit weakness in the financial services industry. Furthermore, new capital and bank structure rules are intended to strengthen resilience to any future financial crises and to provide greater consumer protection. These combined changes mean that the banking sector needs to review and update internal processes and systems to adhere to these changes. Systems alone, however, cannot prevent financial crime and the banking sector is updating its culture around ethics, risk management and compliance.
Changing regulations – There is an unparalleled level of regulatory reform taking place globally across financial services. These reforms aim to reduce systemic risk in global markets by making them safer. Regulations involving restructuring banks, increasing tax transparency or strengthening capital requirements, are being drawn up and rolled out globally. These are complex and, in many cases, span across products and regional jurisdictions.
Innovation – Changes in technology are making it easier for smaller corporates to adopt the treasury and cash management practices of much larger multinationals. We are seeing some exciting innovations coming from FinTech companies, which present opportunities to address some of the efficiency challenges across our industry. However, the scale of these firms is still relatively small and their models have yet to be tested.
How are these client-side and bank-side trends affecting the way you offer and price your services?
Customers are becoming more sophisticated than ever before. The digital landscape is changing how our customers interact with us, while also driving faster and more efficient banking.
Building digital capabilities provides an opportunity to offer all customers a personalised dialogue, supporting a broad range of their individual needs. It enables us to react rapidly to external changes and explore new business models in conjunction with leading partners. It gives customers greater control and allows a more proactive and timely dialogue.
HSBC is focused on mobile innovation. HSBCnet Mobile, our corporate mobile platform, is used by 40,000 customers who access the service from 54 countries in 21 languages. Transaction volume growth from this channel has exceeded our expectations and customers are guiding us on how to take these offerings further.
HSBC has also established an Innovation team to foster development within the bank as well as manage a portfolio of strategic innovation partnerships and investments.
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?
Global customers expect standardisation and deep market integration from an international bank. Our product strategy has always been focused on customer needs rather than short-term trends. The additional angle is the evolution of regulations that may impact products. A good example is Liquidity Investment Solutions (LIS). It offers a compelling alternative solution for corporate treasurers to the traditional multi-currency notional pool, which is losing appeal due to the regulatory complexities affecting the gains that can be made through these structures.
Customers are generally understanding of the new environment in which banking operates and are appreciative of the consultative engagement used by Global Liquidity and Cash Management to understand customer needs and come up with a best-in-class solution.
Are you finding that internal technology issues (silos, legacy systems, unavoidable complexity) create a disadvantage in competing with FinTech companies?
We are seeing some exciting innovations coming from FinTech companies, which present opportunities to address some of the efficiency challenges across our industry. However, the scale of these firms is still relatively small and their models have yet to be tested. FinTech firms are also likely to face increased regulation with its associated costs, something that traditional financial organisations are well-advanced in addressing.
We believe that there is a strong opportunity to collaborate with FinTech companies to increase the pace of innovation so that customers can benefit from better solutions and services. For example, HSBC has a USD 200m strategic investment fund to invest in innovative companies with technologies that align with our strategy and can be implemented at scale. We have also established an Innovation Lab in Singapore to enable such cooperation, where we invite FinTech partners to work with our customers in a safe and controlled environment.
Now that so many FinTech companies have secure, interesting and fast products, what do you see happening to banks in the corporate space?
Today's sophisticated Treasurer will certainly be keen to experiment with FinTech innovations, as they in their personal lives also experience this. However, corporates have policies and rules to follow and unless there is a very strong business case or cost saving, support from its board, adoption of new "untested" technology will be slow, especially in the larger corporates.
Government regulation affecting the financial services industry, which banks are governed by, is also another barrier to entry for FinTech companies. We therefore believe that collaboration, rather than replacement,is the way banks and FinTech companies will continue to operate in the foreseeable future. As we speak, there is increased collaboration between FinTech companies and banks. Banks will evaluate and roll out technologies that have been developed by FinTech companies, so that corporates can have the best banking experience and banks can leverage technology expertise they may not have in-house. This can be achieved through white labelling of technology products or by partnerships. As an example, HSBC has made strategic investments in a number of FinTechs over the past 12-18 months, including Kyriba and Tradeshift.
How far out do you see FinTech companies being regulated more in line with banks?
As FinTech companies scale up and cover more flows, whether it's B2B or B2C, regulators will pay more attention to them to ensure adequate checks and controls are in place. In fact, regulators are aware of this challenge and worry if this can stifle innovation. Some regulators have launched "regulatory sandboxes", where FinTech companies can innovate without having to worry about whether a particular FinTech solution complies with regulatory requirements or poses unacceptable risks.
Treasurers are now extremely cybersecurity conscious. Is this having any effect on your transaction management business? What about the so-called 'SWIFT hacks'?
According to PwC, 'The Global State of Information Security® Survey 2016', there was a 38% increase in security incidents in 2015 when compared to 2014. Given that security incidents are more common with wide media coverage, Treasurers should rightly be more cyber security-conscious. This is reflected in increased information security budgets in businesses. In 2015, according to the PwC study, Information security budgets increased by 24%.
In addition to corporate security, banks have become targets of cyber attacks as well. In the case of the so-called SWIFT hacks, criminals managed to send false messages over the SWIFT network. This has prompted SWIFT to implement new security protocols and encourage drastic improvements on how financial institutions share information with each other.
HSBC’s strong internal and external education programme teaches staff and clients how to reduce the chances of fraud, along with clear procedures and quick action to help with recovery. As a result of attending HSBC education programmes, some clients have been better able to recognise potential malware. The HSBCnet fraud team caught 99.9% of the value of fraudulent payments resulting from malware in 2015.
What are your views on challenger banks? They have traction in the retail market, but what do you expect for the corporate market?
Competition is always good for the consumer. In the retail market, challenger banks offer more variety to customers. On the corporate side, however, challenger banks play a small part in business banking and are hoping to expand their footprint. When it comes to the larger corporates, an international bank with a good network to all the growth markets will provide a better experience, as today's global businesses demand connectivity and consistent experience.