how transaction banking is adapting · regtech looking at compliance challenges through the smart...

July 2017 | THE BANKER | 105

CASH MANAGEMENT | FINANCIAL INTELLIGENCE GUIDE

INTRODUCTION

Global transaction banks are cominG under pressure on many sides, from a chal-lenging regulatory environment to changing customer demands. New entrants are eyeing this space and could gain an edge from the move towards open banking in many juris-dictions. Incumbents, on the other hand, remain weighed down by legacy infrastruc-ture, viewed as the biggest internal challenge in transaction banking, according the 2016 World Payments Report.

Worryingly for many banks, the transac-tion business is facing falling margins and reduced revenues, after many years of being a profitable and steady source of income that could support other businesses. Research by data analytics firm Coalition shows that the margin in payments, for example, has compressed by more than one-third – from 6.8 basis points (bps) to 3.9bps – between 2010 and 2016.

“The margins are lower for most transac-tion banking products,” says Coalition research director Eric Li, who adds that the overall margin for financial institution (FI) clients is characteristically lower than that of corporate clients.

Nevertheless, institutional banking remains ‘stickier’ than corporate banking, with higher volume flows and a more con-centrated market due to the small number of banks with the large-scale global infrastruc-ture to build a broad product suite.

RETHINKING THEIR OFFERINGHowever, the dip in profitability has led many to rethink their transaction banking offering, both in the FI and corporate space. The ongoing retrenchment is unlikely to turn around soon, as incoming regulations will most likely dampen mar-gins even further.

For example, the Markets in Financial Instruments Directive II (MiFID II), which comes into effect in January 2018, is pre-

HOW TRANSACTION BANKING IS ADAPTING TO CHANGE IntroductionThe historically stable and secure transaction banking business is undergoing great change. Joy Macknight reports on industry initiatives and innovative technologies now coming to the fore.

Now corporates caN see the status of their paymeNt iN real time from their baNk’s portal through aN api call that goes to the database

Wim Raymaekers

dicted to have a negative impact on asset managers’ profit margins, which will have a knock-on effect on the banks that serve the buy-side, according to Mr Li.

“Profit margins for most asset manag-ers are predicted to fall. Fundamentally, if a client’s profitability is deteriorating, then they won’t be inclined to pay higher fees for cash management and securities services,” he says.

“As a result, the smaller providers will be squeezed out and this will lead to more industry consolidation. If a bank isn’t big enough to absorb industry macro shocks, then it is more likely to get acquired by a bigger provider.”

A MATTER OF COMPLIANCEMiFID II is just one of many regulations that are impacting the transaction banking busi-ness. Others include the Payment Services Directive 2 (PSD2), Basel III, Dodd-Frank, and know your customer (KYC) and anti-money laundering rules – all of which incur a considerable cost for banks.

Unsurprisingly, the rising cost of com-pliance is seen as a major external chal-lenge to transaction banking in the 2016 World Payments Report, ranking third after fintech competition and evolving cus-tomer expectations.

“Compliance has become a significant challenge for banks, especially the speed and intensity at which new regulation is cur-rently being mandated in the US, Europe and other jurisdictions,” says Francesco Burelli, managing director, at Accenture Payments Services.

Didier Vandenhaute, PwC partner and head of the consultancy’s global banking and cash management treasury network, testifies to the frustration voiced by banks in regards to the amount of time, resources and energy that needs to be invested just to stay abreast of changing regulations.

“Banks are throwing people and money at compliance, but all this activity doesn’t help improve their business nor the cus-tomer relationship,” he says. In PwC’s 2015 European transaction banking survey, 88% of respondents thought regulation was the number one threat to their business.

KNOW YOUR KYC RULESBoth Mr Burelli and Mr Vandenhaute sin-gle out KYC due diligence as a major pain point for transaction banks, magnified by the large fines being meted out by regula-tors. The Bank for International Settle-ments has voiced concerns about the time-consuming and complex nature of

106 | THE BANKER | July 2017

FINANCIAL INTELLIGENCE GUIDE | CASH MANAGEMENT

KYC rules leading to a reduction in corre-spondent banking relationships. “Many banks are trying to make the customer on-boarding journey more efficient and less onerous, but they must ensure that they don’t fall foul of the regulators,” says Mr Vandenhaute.

To date, the trend has been towards an industry utility to solve the KYC issue. For example, Swift launched its KYC Registry in December 2014 and, as of November 2016, has more than 3000 members. Others includes Bankers Almanac, Depository Trust & Clearing Cooperation’s Clarient Entity Hub, Markit/Genpact’s KYC.com and Thomson Reuters’ Accelus. In February, the Monetar y Authority of Singapore announced it was developing a national KYC utility for financial services.

None have seen a groundswell in adop-tion, however. In its correspondent banking report published in July 2016, the Commit-tee on Payments and Market Infrastructures identified two main issues holding back greater use of KYC utilities: the need for data type and format standards across the different utilities, as well as the backing of relevant authorities.

The emergence of regulatory technol-ogy (regtech) start-ups focused specifi-cally on compliance in financial services will help ease the KYC burden, according to Mr Burelli.

“There is an increased investment in regtech looking at compliance challenges through the smart application of technol-ogy,” he says. “For example, artificial intel-l igence [AI] and robotics are two significant enablers for smart process automation and machine learning that can help FIs address the fast-changing regula-tory environment.”

CHANGING EXPECTATIONSThe new, easy-to-use interfaces and business models being brought to market in e-com-merce and retail banking have revolution-ised the customer experience, and are beginning to have an impact in the transac-tion banking arena. Both corporates and FIs want a more seamless experience, especially in cross-border payments.

Swift has leveraged its network to create the global payment innovation (gpi) initia-tive, aimed at making international payments faster, transparent and traceable. In just 12 months, more than 20 global transaction banks have implemented the Swift gpi, with another 50 in the implementation pipeline. In May, Swift released a real-time cross-bor-der payments tracker, available via an open

application programming interface (API).Wim Raymaekers, programme manager

at Swift gpi, says several banks have already integrated the gpi’s open API into their front-end channels. “Now corporates can self-serve,” he says. “They can see the status of their payment in real time from their bank’s portal through an API call that goes to the database.” Swift is currently exploring multi-bank access to the tracker.

It is also planning an industry challenge with its fintech ecosystem, Innotribe, to develop overlay services for the gpi. Mr Ray-maekers says: “We wrote this collaborative innovation approach into our strategy last year and are now delivering that through APIs and our cloud database. It is an exciting journey to open banking and open APIs.”

Although currently offered to corporate clients, many banks have indicated they will also offer the tracking ability to their FI cli-ents, so the latter can pass on gpi payments through their domestic corridors.

BLOCKCHAIN: THE MISSING LINK?In addition to industry initiatives such as Swift gpi, to help improve transparency and standardisation in transaction banking, Mr Burelli mentions emerging technologies, such as blockchain, or distributed ledger technology (DLT). He highlights the many proof-of-concept (PoC) pilots currently under way at different banks. “In five years’ time, some of these blockchain initiatives will emerge as proven platforms for specific use cases, for example cross-border pay-ments, clearing and settlement,” he says.

For example, in April Swift launched a PoC application, in collaboration with sev-eral global transaction banks, to test whether banks can use DLT to improve the reconcili-ation of their nostro accounts in real time, optimising their global liquidity. The results will be presented at the Sibos conference in Toronto in October.

According to Mr Burelli, AI, robotics and data analytic tools will fundamentally change the transaction banking business. However, Mr Vandenhaute is disappointed there has not been more investment in data analytics to date, particularly on the corpo-rate banking side.

“These banks have huge amounts of transaction data, but it sits in many differ-ent systems and often isn’t harmonised. Banks also seem more hesitant than large online players or fintechs to use customer data, but they could truly benefit from the masses of data they control, as well as lever-age PSD2 and the move to open banking,” he says.

INTRODUCTION

3

4

5

6

7

8

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2010

6.86.7

5.4

5.0

4.9

4.13.9

2011 2012 2013 2014 2015 2016

Payment margins(bps)



CREDIT

Despite the crucial role that intraDay creDit plays in enabling the smooth func-tioning of global payments, clearing and settlement systems (encompassing securities and derivatives), historically these flows were below the radar of regulatory supervision.

The main reason was because of the typi-cally unadvised and uncommitted – and therefore unreported – nature of this cate-gory of credit. It does not appear on a bank’s balance sheet, as usually the liquidity under-pinning these credit lines is released in the morning and squared off by the day’s end. But by virtue of being unadvised and uncom-mitted, these intraday credit lines between users and correspondent banking providers could theoretically be withdrawn any time, at the provider’s discretion.

The collapse of Lehman Brothers changed regulators’ perception of the sys-temic risk posed by financial institutions (FIs) being unable to cover their payment obligations. The global financial crisis exposed the vast (in terms of volume and value) credit lines extended daily between FIs to make payments. In a crisis, such credit lines, along with interbank money market lending lines, can evaporate within the busi-ness day, effectively bringing the global pay-ment system to a grinding halt.

UNDER REGULATORS’ SCRUTINYWhile this scenario did not play out in full during the 2008 crisis, it did propel intraday liquidity and intraday credit into the regula-tors’ line of sight. As outlined in the Basel Committee on Banking Supervision’s set of monitoring tools for intraday liquidity man-agement (BCBS 248), published in April 2013, internationally active banks are now being asked to measure usage and report their intraday commitments. The monitor-ing tools complement the Basel III frame-work and liquidity ratio requirements, which are currently being phased in.

As well as measuring and reporting dur-ing normal market conditions, regulators

INTRADAY CREDIT: UNDER THE REGULATOR’S MICROSCOPE CreditDeutsche Bank’s Christine Thomas talks to Joy Macknight about the increasing regulatory oversight of intraday credit and how market participants are responding to emerging regulations.

If a bank Is extendIng Intraday lIquIdIty to certaIn clIents, [regulators] may want to explore what that means under stressed market condItIons

Christine Thomas

want to understand how these credit lines would perform in a crisis scenario. “The reg-ulators are attempting to make the global system more stable by shining a spotlight onto this sphere,” says Christine Thomas, head of financial risk, institutional cash management, at Deutsche Bank.

While the general stress-testing being performed under Basel III to date has not been extended to intraday liquidity specifi-cally, Ms Thomas believes this might change. “The regulators are requesting data around the usage of intraday credit lines and can be expected to analyse this data once it is fully available,” she says. “If a bank is extending intraday liquidity to certain clients that use it on a regular basis, then they may want to explore what that means under stressed market conditions.”

Currently, unadvised and uncommitted credit lines do not create risk-weighted assets (RWAs), and as such they do not absorb equity. However, if the regulators decide that there is a type of credit compo-nent in intraday liquidity that merits assets and equity to post against it, then the availa-bility of unadvised and uncommitted intra-day credit lines might decrease in the future, according to Ms Thomas.

“If regulators decide to use a blunt tool, such as requiring equity be put against these vast credit lines, then banks would have to charge for that, which in turn would drive up the costs of the entire system and potentially drive down availability,” she says. A coordi-nated approach is key to addressing this issue, she adds, in addition to assessing the impact with all stakeholders prior to chang-ing the rules.

IMPACT OF REQUIREMENTSIn many jurisdictions, regulations govern-ing how intraday credit lines and liquidity usage are to be reported have yet to be transposed into local law. The new report-ing requirements were originally planned for introduction in January 2017, but



deadlines have been pushed back.Different jurisdictions are at differing

stages of implementation. For example, the UK’s Prudential Regulation Authority pub-lished guidelines in August 2015 and updated them in March this year. Also in 2015, the Hong Kong Monetary Authority released locally reporting requirements on intraday liquidity positions in both payment and settlement systems, as well as with cor-respondent banks.

Swift, in association with the Liquidity Implementation Task Force, has also devel-oped global market practice guidelines for intraday liquidity reporting messaging. The guidelines describe usage of intraday confir-mations on a per transaction basis including a time stamp accurate to the minute, which is a key way to comply with reporting requirements, according to Ms Thomas.

“By having guidelines around the infor-mation being provided and received, it is possible for the monitoring bank to match information from different providers, which offers a real-time overview and is agnostic as to who is providing the payment informa-tion,” she says.

COMPLICATING THE ISSUEBut with no globally binding regulations for reporting currently in force, many jurisdic-tions are implementing diverging rules, thus complicating compliance. However, the direc-tion of travel is clear. Ms Thomas says: “While reporting requirements may differ country to country, regulators want to have oversight of the total credit lines and the highest usage threshold, to assess the worst-case scenario.”

Once reporting is widespread, it remains to be seen what the regulators do with the information – but most expect them to begin digging deeper into intraday credit risk dur-ing the supervisory review process.

Ms Thomas reports that one regulator has asked Deutsche Bank to provide credit not only based on the bank’s credit appetite but also on observed client usage, which is a significant shift in mind-set. “Effectively, that means we must monitor the usage of intraday credit lines and consider setting them at a different level, as well as poten-tially reducing them,” she says.

It is a balancing act. On the one hand, intraday credit lines are unadvised and uncommitted, so banks do not have a com-mitment; but on the other hand, the more that regulators focus on the intraday space, the less intraday liquidity may be available or the more costly it might become, especially in stressed market conditions.

“Regulators are indicating that, going

forward, it will not be possible to rely on unadvised and uncommitted credit lines. Therefore, market participants need to have secure funding sources, which means either more committed credit or more liquidity sourced elsewhere – but both come at a price,” says Ms Thomas.

SYSTEMIC OVERSIGHTIn order to address the potential systemic risk inherent in intraday credit, the regulators focused on central securities depositories (CSDs) and central counterparty clearing houses (CCPs), and then turned to interna-tionally active banks. Whether other banks and FIs should be a focus of the regulation will be at the discretion of the national supervisors.

In 2015, the European Banking Authority (EBA) published regulatory technical stand-ards for monitoring, measuring, reporting and public disclosure specifically for CSDs, as mandated by EU regulation 909/2014. “The EU regulators are focused on liquidity risk management,” says Ms Thomas. “The CSD, or banking service provider, has a risk on the liquidity side because of the unadvised and uncommitted nature of credit lines.”

The EU regulators require entities regu-lated under this directive to provide different solutions to make the system more stable. One such solution is to put in place commit-ted credit lines or similar agreements. For example, a CSD or CCP might be requested to move a certain portion of its existing intraday credit lines from an unadvised and uncommitted position to a committed intra-day credit facility.

NEW PRODUCT DEVELOPMENTAccording to Ms Thomas, Deutsche Bank has developed a new type of intraday credit product specifically to address this require-ment: a committed daylight overdraft limit. “At this stage, it will be predominantly for those clients that fall under this legislation, mainly because moving to committed credit, whether a loan or overdraft facility, comes at a cost,” she says. “We have also met client needs by putting committed repo and com-mitted foreign exchange solutions in place.”

In addition, the bank is looking at devel-oping variations on the committed intraday product, according to Ms Thomas. “Basi-cally, any variation will be a commitment to support cash clearing, but there will be dif-ferent versions driven by client type, their credit standing and the bank’s risk appetite,” she says. “Additionally, it will come down to a question of cost – because both uncollateral-ised and collateralised credit has implica-tions on pricing.”

CREDIT

In the past, Intraday lIquIdIty hasn’t been free, but Intraday credIt has been perceIved as a free resource Christine Thomas



As the regulation emerges, Deutsche Bank remains in close dialogue with clients, regula-tors and the industry to develop solutions that match client interest, regulatory requirements and its own credit perspective. “We are devel-oping several different product sets and tools, but all will be closely related to the committed intraday product – predominantly intraday, but possibly overnight,” says Ms Thomas.

The bank is also exploring a better way to measure a portfolio’s risk-return profile. Con-ventionally, most banks use the return over RWA methodology. However, as previously indicated, unadvised and uncommitted intra-day credit lines do not create RWAs because the funds are normally repaid at the end of the day. Therefore, it is not possible to measure these substantial portfolios in classic metrics.

To address this, Deutsche Bank has developed an intraday-specific methodology to correlate credit quality, risk appetite and revenue for an individual client or counter-party, called return over risk-weighted day-light overdraft limit.

“This is a big change for us. It means we can better evaluate and direct our portfolios, effectively putting our credit fire power towards preferred clients that can generate a decent risk-return,” says Ms Thomas. “It allows us to adjust quickly to changes in cer-tain markets or in risk perception and/or risk appetite.”

EFFICIENT USE OF LIQUIDITYUltimately, better liquidity management is the best way to minimise the cost of liquidity, according to Ms Thomas. For example, in order to cover its intraday payments, a bank must either make its own funds available by prefunding the account or having a credit line in place, which incurs cost. Additionally, the more collateral a bank can put against credit, the lower the cost of that credit is – but collateral also comes at a cost.

“Purely from a cost perspective, it depends on whether the individual entity can better manage its liquidity. Credit comes with an associated cost but it might be less expensive than sourcing cash elsewhere. Banks should also optimise their payment behaviour so that throughout the day, or a specific time period, their outgoing flows match incoming flow, and, as a result, it will need less intraday liquidity,” she says.

The onus is on banks to optimise their intraday liquidity management and many are rising to the challenge. “In the past, intra-day liquidity hasn’t been free, but intraday credit has been perceived as a free resource,” says Ms Thomas. “But now that it has been brought into the spotlight, banks are begin-

ning to think about how to better manage this resource.”

Some optimisation of liquidity flows is already happening through CCPs. But, as Ms Thomas points out, this in turn makes CCPs more systemically important. “That is the reason the EBA has targeted CCPs in the first regulation. They can’t fail – they are that important to the system. If a large bank fails, that would be a big issue, but if a CCP were to fail then the system would be in deep trou-ble,” she says.

FOR THE GREATER GOODUncertainty remains about the end state of the emerging intraday liquidity regulation, together with general global regulatory uncertainty regarding Basel III’s progression and the future of the Dodd-Frank act. How-ever, overall the regulators are moving in a positive direction. Globally, their overarch-ing aim has been to establish safety nets and increase equity in banks.

Regulators want banks to be safe because they are at the heart of the economy. “Increas-ing transparency in the system, making the industry focus on things that have been taken for granted in the past and putting commit-ment in place – these all have the potential to increase the stability of the global payments systems and cash clearing,” says Ms Thomas.

Regulation will not take all the risk out of the financial system – it cannot and, most would argue, should not – but it can make the entire system more secure for market participants and, by definition, for society as a whole.



The collapse of Lehman Brothers changed regulators’ perception of systemic risk

CREDIT



LIQUIDITY


In January 2017, banks took another step closer to fully implementing the

post-crisis regulations set out by the Basel Committee on Banking Supervision, as part of the phase-in arrangements. In addition, the Basel III reforms triggered a new interpretation on operating cash. What are the main considerations for institutions going forward?

That is true: under Basel III there is a much stricter definition of the term

‘operating cash’. Under Basel I and II, oper-ating cash could pretty much include all types of cash received from a depositor and, therefore, the more deposits a bank held, the better. However, now under Basel III, there is a need to understand the correlation of cli-ents’ deposits to the clients’ product usage depth with the bank to determine whether a client deposit is ‘good’ or not.

Essentially, there are four main consid-erations. You need to be able to identify when liquidity is ‘good’, or operational; when it is non-operational; what it means for service providers who support clients’ liquidity and their intraday liquidity monitoring; and, most importantly, what clients could do to maximise the return from their relationships with those providers.

How important is it to have an in-depth understanding of the range of

rules directly affecting banks’ capacity to support liquidity?

It’s essential. There are several ele-ments of Basel III alone that affect

bank liquidity. The most underestimated one in connection to deposits is the leverage ratio. This has been designed to tackle the increasing on- and off-balance sheet lever-age that existed in the banking system before the crisis.

The leverage ratio is not a risk-sensitive measure, but is ascertained by viewing the bank’s capital in relation to its average assets

THE CHANGING DEFINITION OF A DEPOSIT LiquidityPreviously, clients would call their bank to warn of an unintended overdraft position; today they call if they want to leave more money than usual on their account. Koral Araskin, liquidity manager in Deutsche Bank’s institutional cash management division, explains how regulation has affected the liquidity management landscape and why there is no one-size-fits-all approach to deposit optimisation.

Under Basel III there Is a mUch strIcter defInItIon of the term ‘operatIng cash’

and exposures. As this constrains the carry-ing of assets, banks are more cautious about what they place on their balance sheet. This also applies to cash deposits, which, to a cer-tain extent, will end up as assets at the cen-tral bank, and as such influence the leverage ratio and consume capital.

Within the balance sheet, other aspects of regulation, such as the liquidity coverage ratio [LCR] and net stable funding ratio [NSFR], will also have an impact. The NSFR is designed to limit a bank’s reliance on short-term wholesale funding, while the LCR requires a bank to have an adequate supply of high-quality liquid assets on hand to tackle a 30-day liquidity stress scenario. The LCR in particular has been brought in to ensure that banks have the right types of cash to meet any loan commitments in that period of financial stress.

Additionally, we are about to move into a new era when it comes to gaining a better understanding of intraday liquidity demand and supply in the financial industry. While the regulation in this area is still at an early stage, it is clear that this previously invisible spot will trigger much movement and investment into mature businesses, such as cash clearing.

Not only are there many interlinking aspects to take into consideration, but so is the fact that central banks themselves have different interpretations of the Basel III guidelines. This complicates the situation even further.

Earlier, you mentioned a change in how ‘good’ liquidity is defined. Can

you explain this in greater detail?With the new liquidity rules for banks, one of the main intentions is to priori-

tise deposits less likely to be withdrawn at short notice during a stress scenario. It is pertinent to consider the distinctions between a financial institution’s (FI’s) and a


non-FI’s money. Generally speaking, corre-spondent banking money is considered to be fully at risk of run-off in a stress scenario.

That said, a wholesale client’s opera-tional deposits that form part of clearing, custody or cash management are considered to be ‘more sustainable’ due to its depend-ence on the bank’s continued services, even during the 30-day stress period. Indeed, as stated by the European Banking Authority: ‘Deposits maintained by the depositor to obtain clearing services that fulfil all of these conditions shall then be subject to a 25% or 5% outflow rate, even if they are held on cor-respondent banking accounts.’ This would typically be defined as ‘good’ liquidity and receive privileged treatment.

Similarly, evergreen or short-term deposits with a tenor of more than 30 days are deemed ‘good’, given the fact that they represent an opportunity for the deposit-taking bank to use these funds over a longer period of time, thereby supporting higher yielding assets.

Additionally, every bank will have more specific stress scenarios that, as an example, could trigger additional tenors that they

need to focus on in terms of managing liquidity reserves. Hence, banks could have additional appetite for certain tenors.

What does that mean for bank prod-uct pricing and solution structuring?Given that we are now operating in an environment in which some deposits

are considered more valuable than others, it is natural to assume that this results in dif-ferentiated pricing. However, it would be wrong to assume – from Deutsche Bank’s perspective – that deposit pricing is solely driven by regulatory reform.

In some cases, we have client relation-ships that span decades, so we factor in com-mercial aspects of the business affiliation. As such, there is no ‘one size fits all’. We work closely with our clients to help them find the right amount of cash required to deal with operational objectives, liquidity and yield within the overall context of their business.

How does Deutsche Bank approach this issue? We are closely monitoring the liquidity portfolio worldwide to better under-


Recently diverging rate paths(%)


LIQUIDITY

0

-1

1

2

3

4

5

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Source: Reuters

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ECB deposit rate

Fed target rate



stand the client and currency mix across our global client base. We do so not only for the major clearing currencies – the euro, US dol-lar, British pound and Japanese yen – but also for all other so-called multi-currency deposits we offer clearing services for.

Core to our business is building strong partnerships and focusing on a constructive dialogue with our clients. As an example, we speak to our clients individually if we observe any change in liquidity behaviour that could trigger opportunities or need to be addressed. We also build relationships into our clients’ treasury functions when it comes to liquidity-related aspects.

We want to understand the liquidity pat-tern of our clients to better serve them. This may then result in better client conditions, but it could also raise demands of clients by requiring stronger clearing flows to retain good conditions.

As one of the largest clearers in the market, can you offer FI clients more

favourable solutions or conditions?I strongly believe so. Being active in the world’s major currencies as a domi-

nant clearer helps to trigger and fulfil the regulatory criteria of having strongly opera-tional relationships with according opera-tional deposits.

Still, individual clients might have much higher liquidity reserves than their opera-tional flows require. Here, we offer call and term deposits, as well as recommend other types of asset classes. This helps the clients to maintain operational sight deposits at pre-ferred conditions, while maximising yield by moving less operational segments into higher yielding but still fairly liquid asset classes.

LIQUIDITY

from a lIqUIdIty management perspectIve, changes In Interest rates mIght resUlt In a potentIal to recalIBrate a clIent portfolIo

While the concept of negative interest rates is usually more a pain than a gain, it may even help here to avoid cost by co-oper-ating and finding alternatives with mutual benefit. Therefore, even in euros a client with a broad clearing business portfolio with us may get preferred treatment dependent on their individual clearing activity breadth and depth.

What will happen now that interest rates are rising again?Besides the changes in interest rate levels, we also have to keep in mind

that the markets are flushed with liquidity. Central banks have a critical task here to balance and align these with the overall economic developments. With the increas-ing transparency on intraday liquidity sup-ply and demand, it will be interesting to observe the shifting gears in monetary pol-icy and how these might change current patterns and flows.

From a liquidity management perspec-tive, changes in interest rates might result in a potential to recalibrate a client portfolio. Generally speaking, you would like to help long-standing client relationships, with increasing operational business flows, par-ticipate strongly during rate hikes, and try to protect them from rate cuts – even into nega-tive territory – as much as possible.

Looking at the pace of change in interest rates in the major currencies – US dollars and euros – is key. While there seems to be a clear – or at least expected – dollar rate tra-jectory, it is still unclear if, when, how, and to what extent rates will increase on the euro side. At the moment, I only see expectation levels rising.

Correspondent banking Non-correspondent banking(for example, corporate banking)

Clearing, custody and cash management

Operational(privileged treatment)

Non-operational



PAYMENT SERVICES

The second PaymenT services direcTive (Psd2) is a game-changer for The euro-Pean banking indusTry. Although much of the focus to date has been on the retail, the directive will also have a disruptive impact on transaction banking.

The profound change it will bring about might not seem apparent at first glance, par-ticularly compared with its forerunner. The PSD1, established in 2007, created the single market for payments and harmonised pay-ments processing in the European Economic Area, including execution time and fees. This basic framework remains unchanged under PSD2.

The second iteration of the directive, which member states must transpose into local law by January 2018, extends the geo-graphical scope of the original to include ‘one leg out’ payments, applicable where at least one participant is based in the EU. It also mandates, in most cases, strong two-factor authentication to bolster customer security.

Most importantly, PSD2 obliges banks to open up their customer account inter-faces to new third-party providers (TPPs), with the aim of fostering innovation and competition in the payments space. Accord-ing to the European Payments Council, TPPs will have access to consumers’ pay-ment account to make payments on their behalf and provide an overview of their vari-ous payments accounts.

A NEW ERA OF BANKINGThe way this is being implemented – through application programming inter-faces (APIs) – has the potential to radically alter how banks manufacture and deliver services and products. Together with other initiatives, such as the UK’s Open Banking (which also comes into effect at the begin-ning of next year), the PSD2 heralds a new era of banking.

To clarify, the directive does not mandate the use of APIs; however, the industry views APIs as the best technical solution for PSD2 compliance. As Christian Schaefer, head of

LEVERAGING PSD2 TO OPEN UP TRANSACTION BANKING Payment servicesWhile most of the buzz around the updated EU Payments Services Directive has centred on benefits to retail customers, its role in ushering in open banking will create new opportunities in transaction banking. Joy Macknight reports.

The poTenTial is enormous when greaTer access To informaTion enables paymenT iniTiaTion

Liz Oakes

payments, corporate cash management at Deutsche Bank, says: “The regulation fore-sees two options for providing access [to TPPs]. The first is a dedicated interface, such as an API.

“The second option is direct access; effectively the bank’s existing online chan-nel, which requires significant alteration to be PSD2 compliant.” Most banks have cho-sen to use a dedicated interface, he adds.

“The PSD2’s success as a driver of inno-vation is linked to banks’ adoption of APIs and investing in dedicated, versus direct, access,” says Mr Schaefer. “Importantly, reg-ulators must set the right incentives in inter-national transposition, as well as develop appropriate RTS [regulatory technical standards], to ensure that banks provide and develop APIs.”

Developing an API standard will also promote uptake, according to Christian Fraedrich, product manager, treasury pay-ments and euro clearing, institutional cash management, at Deutsche Bank. Several organisations are working towards a com-mon standard, such as the Berlin Group, a pan-European payments interoperability standards and harmonisation initiative.

“When it comes to the adoption of APIs, the more banks and countries that join the Berlin Group and implement standardised APIs across Europe the more successful it will be going forward,” says Mr Fraedrich.

BUILDING AN ECOSYSTEMWhile many banks have been using APIs internally for a number of years, very few have made the leap and opened up access to external developers and partners. In response to a recent Aite Group survey, 81% of banks said they have used APIs for con-necting internal systems for two years or more, but only 14% had given external access to their systems via APIs. But the trend is clear: 21% reported that they had developed open APIs in the past year and 52% indicated they are planning to do so within the next two years.

In its 2016 report, ‘Understanding the business relevance of open APIs and open banking for banks’, the Euro Banking Asso-ciation identified the potential risks for banks in this new environment, including disintermediation, as well as general repu-tation and compliance risks. But it also says open APIs and open banking could “pave the way to enhanced innovation and customer relevance, industrial partner-ships with the larger ecosystem of fintech market participants”.

Ismail Chaib, chief operating officer at Tesobe and the Open Bank Project, a Berlin-based fintech start-up that provides open APIs to financial institutions (FIs), believes open banking will bring a form of democrati-sation to the banking industry.

“Banks can move from one-to-one,



specific partnerships to a larger network of partners. They will benefit from more inno-vation and new propositions emerging that wouldn’t have otherwise,” he says. For exam-ple, the Open Bank Project has a global com-munity of more than 6500 developers that use its 130 banking APIs to build fintech applications, he adds.

If banks “do PSD2 right” then the banks, their customers and software devel-opers will all benefit, says Steve Kirsch, CEO of open banking platform Token. “PSD2 enables software companies such as Token to come in and write software that works across all banks. We can act as the grease on the wheels to make payments faster, at a lower cost, more secure, and with less reconciliation effort required because of higher straight-through pro-cessing rates and additional associated information,” he adds.

DISINTERMEDIATION WORRIESBut disintermediation remains a top con-cern for many banks. Both Mr Kirsch and Mr Schaefer emphasise that, while open access makes it easier for new players to enter the market, banks can also act as TPPs and create unique applications that meet their customers’ needs – and in the process, disintermediate other banks, adds Mr Kirsch.

Mr Fraedrich argues that banks are, in fact, in a better position than fintechs under PSD2 because TPPs need to be licensed to provide services. “Banks already have the licence to act as a TPP vis-à-vis corporate and retail customers, bringing together account information or acting on behalf of clients – and they also have multiple rela-tionships with other banks as PISPs [pay-ment initiation service providers],” he says.

According to Ben Robinson, chief strat-egy officer at banking software vendor Temenos, fast-moving transaction banks could use PSD2 to establish the principle relationship with their corporate clients. “This presents an opportunity for one bank to aggregate the corporate’s bank accounts – and become a PISP as well. In that way, the bank could provide a cockpit through which a treasury department could do interbank pooling, for example, because the former can initiate payment on behalf of that cus-tomer in all their different banking accounts,” he says.

BANKING AS A SERVICE“In addition, as an aggregator, the bank could provide value-added analytics across customers’ accounts, payments and trans-

actions,” he adds. He foresees a scenario where banks could subsume the in-house treasury team.

Enrico Camerinelli, Aite Group’s senior analyst and author of the ‘Corporate banking API strategies’ report, sees PSD2 as a trigger for banks to look at what it means to be cli-ent-centric in a corporate context. “If a bank is forced to provide open access to its retail client accounts, then why not consider doing the same for its corporate clients?” he asks.

He anticipates that in the next two years, banks will move from narrowly focusing on payment-centric APIs to a wider corporate transaction banking-based API plan. He says some banks with robust and efficient back-office systems for cash management, trade finance and other basic treasury func-tions are now exploring giving access to these functionalities to the corporate user through open APIs.

“If a small or mid-sized corporate doesn’t have the budget to spend on a treasury man-agement system, for example, but needs basic cash forecasting or foreign exchange transaction management, then it could use what the bank uses for its own internal busi-ness through open APIs,” he says, adding that small FIs could also leverage the func-tionality of a large transaction bank.

Liz Oakes, expert associate partner at McKinsey, agrees this is a future trend. She believes one of the first capabilities that should be made available is the type of cash management that has largely been reserved for large corporates and multi-national cor-porations. This includes netting, pooling, sweeping, cross-currency account facilities, access to better information on the status of payments, invoice presentment and pay-ment – “things that actually help them with working capital solutions and supply chain finance”, she says.

REAL-TIME POTENTIALIn combination with PSD2 and open bank-ing, Ms Oakes believes that instant pay-ments, which will see a global upsurge as the EU, the US and Australia come online with their platforms later this year, will amplify the shift in corporate customer expectations that has already occurred on the retail side.

She says: “The potential is enormous when greater access to information, whether linked to fintech or more widely to the Internet of Things, robotics and advanced analytics, enables payment initia-tion. Couple this with immediate access to funds and the ability to initiate transactions instantaneously, and a powerful set of capa-bilities is now possible.”

PAYMENT SERVICES

As an aggregaTor, The bank could provide value-added analyTics across cusTomers’ accounTs, paymenTs and TransacTions

Ben Robinson

how transaction banking is adapting · regtech looking at compliance challenges through the smart...

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