Spanish banks are struggling to meet the fast-growing requirements of the countrys corporates, many of which are following aggressive global expansion strategies. Ivan Castano looks at how the transactional and cash management requirements of those are being met, and what Spains banks are doing to catch up
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Spanish corporates have been taking some global markets by storm in recent years. Just think Inditex. The owner of the expansionist Zara fashion chain has installed thousands of stores around the world in the past five years, making its presence ubiquitous in most global capitals. The story, of course, extends to the banking and telecoms sector – particularly with Santander and BBVA. Meanwhile, a handful of swashbuckling enterprises in the construction and energy sector, notably FCC, Iberdorla and Gamesa, are following suit, further bolstering Spanish corporates globalisation efforts.
All of these companies, of course, need banks to manage their growing international payments and cash management requirements. The problem is, most second and third-tier Spanish banks have let their larger European or US rivals do the job, leaving them with little room to manoeuvre when it comes to servicing the new wave of expansionist, international Spanish corporate. And as the country struggles through one of the deepest recessions in its history, the need for these entrepreneurs to move and expand in overseas markets has never been greater.
For banks, too, there is a tremendous pressure to boost profits as bad-loan losses continue to mount in the ravaged economy, with unemployment hovering at 20% and dimming hopes of a rapid recovery.
"Clearly, there is rising trend for big industrial players to globalize and Spanish companies are no exception," says Carlos Gutierrez Salan, a transactional banking director at Santander in Madrid. "We are getting more and more demand from companies that need support expanding abroad. However, the biggest challenges banks face are finding the tools to offer these companies a centralized and consolidated platform though which to handle their payment flows.
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By GlobalDataJose Buey, who manages Deutsche Bank’s GTB business in Spain, says transactional banking remains "a pending assignment" for most Spanish banks, save for the bulge-bracket institutions like Santander, BBVA or La Caixa.
"If you were to do a survey today, you’d find that most domestic banks can offer quality transactional banking services in Spain, but when it comes to international transactions, it’s a different story."
Even Santander and BBVA are somewhat dwarfed when attempting to meet Iberian corporates growing expansion needs in Asia or other emerging markets like the Middle East or Africa, observers say.
"Because of their large office networks, they obviously have a lot of capacity when it comes to serving Latin America. In Asia, however, they lack the scale of larger global banks," Buey adds.
These "larger" global banks include firms such as Citibank, HSBC and Deutsche Bank, all of whom have been supporting Spanish corporates’ globalisation efforts for some time.
This, however, is changing. According to bankers, Spanish institutions are scrambling to build up their international banking capabilities as they realise that corporate and transactional banking can help to sharply boost profits in an otherwise weak domestic market.
"Spanish banks have not traditionally viewed transactional banking a separate business [as in other banks] that can offer extra benefits and liquidity, but in the last couple of years, this has been changing," adds a Madrid-based senior GTB banker who requested anonymity.
Challenging road ahead
But offering transactional banking services is not the same as being an established global transactional institution, observers say, adding that Spanish lenders are facing big challenges when it comes to scaling up their international capabilities. For this reason, many are choosing to partner with other banks that can offer the IT and backbone capabilities, as well the staff and extensive branch network they lack in many foreign markets. This, observers say, is much cheaper and less risky than trying to offer these services on their own.
Deutsche Bank, for example, offers white label transaction banking through which it provides a local Spanish institution with a range of transactional banking services. In this partnership, the bank’s end client doesn’t necessarily know that Deutsche is involved, enabling the former to concentrate on selling its services.
These partnerships have their downsides, however, notably high and lengthy IT system integration costs, bankers say.
According to Buey, Deutsche Bank minimises these problems by offering one standard transaction channels and a single payment platform based on international standards such as the ISO20022 to run all services.
"These partnerships work very well in offering small banks the services they need to meet their clients’ needs as they move abroad," Buey adds. He says Deutsche Bank is also offering what he calls "payment factory" services to corporates in which it consolidates all their domestic and international payments into a single processing channel and file format. As part of this initiative, it is also adding value-added services such as supply chain finance and advanced foreign currency payments to corporations.
A way forward
There are a number of ways Spanish banks can flesh out their foreign transaction banking, observers say. Correspondent banking – an open liaison in which clients know their bank is partnering with another – can also be a good option over the more expensive white label partnership.
In correspondent banking, however, banks run the risk of their partner bank taking business from their clients. This can also happen in white label partnerships though it is less common.
Michael Burkie, market development manager at the EMEA treasury services division of BNY Mellon, says Spanish banks must feel comfortable that any global payment providers they team up with will not target the same clients. He says in the case of BNYMellon this is relatively easy, as the institution can clearly demonstrate that in most markets it does not operate as a retail, investment or corporate bank seeking new clients. The institution describes itself as an investment services bank focused on transactional banking services. However, though in the US it clearly has a broader business scope. Burkie is sceptical when it comes to white label partnerships.
"Back-office partnerships are not always the best way to support clients," he says. "This is because you may end up serving your clients the way the other bank does and this may not be what you want," Burkie explains. In order to avoid this issue, BNYMellon offers clients a "transactional bridge" connecting them with several banking partners in a specific country. Sometimes, when a foreign institution cannot meet its clients’ banking needs in one country, it finds a bank with a regional footprint.
Remittance
One high-volume transaction area the US bank is involved in is the Spanish remittance business, which is growing strongly as a rising number of South American immigrants (in particular Ecuadorians) boost remittances to relatives at home.
"10 years ago remittance payments to Ecuador were not that high, but now they are," Burkie says. Like with other transaction banking, "Spanish banks must assess whether they want to do this service on their own or outsource it but why spend money handling volumes that may not be there in a few years?"
"By coming to us, they can break into new transactional markets and we can get them there quickly. If they no longer want to offer the service, we can switch it off."
These types of outsourcing partnerships certainly reduce the risk of building a foreign payments platform for a service that may not last. It also saves banks from the need to build their own IT payment systems, hire new staff and build an office network in a foreign country where they don’t know how much business they’ll have.
For banks like Santander, doing this can be a less risky proposition. But if you are second or third-tier Spanish bank, the stakes are higher. "Tier one banks are integrated to provide transaction services to large companies such as [the Spain-based, Volkswagon-owned] car manufacturer Seat, or as small as a mom-and-pop shop," Burkie adds "The smaller banks, have very limited maneouvre, however."
Partner to save
For this reason, Nancy Atkinson, a senior analyst at US payments consultancy Aite Group, says that Spanish banks are better off partnering than building an international transactional platform on their own, which can cost at least $20m to set up.
Apart from white-label and correspondent partnerships, banks can also use so-called core-processing firms such as Temenos, Sunguard and Logica which offer a less fancy yet cheaper back-office service.
However, Atkinson notes that working with another bank does have its advantages.
"Another bank understands the banking business as well as multi-country laws and regulations so if you are a new entrant and can build a good relationship, you can leverage your partner’s expertise to provide extra services to clients," Atkinson muses.
This approach is less expensive and risky than building a service and expertise in-house, she adds. It is hard to predict how much a bank can save from outsourcing versus setting up its own foreign transaction service but even after paying high middleman fees, outsourcing remains the more profitable and safer bet, Atkinson says.
According to Atkinson, global banks can charge their smaller peers as much as $0.50 for a low-volume transaction. In white label offerings, banks typically charge a monthly maintenance fee on top of transaction fees.
Still, because foreign transactional banking also brings higher margins than domestic transaction banking market, Spanish banks can still make a good profit on the business. Burke says that business typically means offering corporations high value/low volume payments such as those that must be made in 45 minutes, very high volume/low value payments and multi-currency payments. And these days, given falling volumes at home, banks are keener than ever to offer any services they can to Spain’s growing armada of expansionist enterprises.
