International trade flows are developing in new directions, with South to South flows becoming an increasing focus. How are European banks adjusting to the changing economic environment? Sara Perria reports on the strategies adopted by Société Generale and RBS
Major banks across established economies have been facing extraordinary challenges in recent years. On the one hand, the economic crisis has deeply undermined their business model, finances and even ethics. Some of them, such as the Royal Bank of Scotland (RBS) have survived only thanks to government intervention.On the other hand, emerging – or rather recently-emerged – economies now have a much grater role to play, expanding and diverting the traditional directions of trade flows. To assist firms navigate the new landscape, global European-headquartered banks have been investing heavily in ways of maximising the potential in their networks in order to meet new requests. Speed, risk management, regulatory compliance, and the ability to maintain flexible relationships with partners abroad are identified as the key factors to success.
The challengeSociété Generale is a typical example of a European-based bank adjusting to the changing economic environment. The main stream of its client base is Western European and American: companies who operate all around the world with wholesale banking needs, from cash measurement services, trade, factoring. On top of this, the bank has a retail network in Central Eastern Europe, including Russia, but also in Africa and, more recently, China and India.
"Our aim is to say: ‘We have got a strong Western European bank, we have a strong African network, we can open up those markets for you.’ For the Asian clients, we think the ‘African card’ is a good one to play, because we have a deep knowledge of that network," Société Generale head of global transaction banking Pascal Augé explains. French Société Generale can count on strong connections with local governments, institutions and local enterprises, especially in the northern, largely francophone, part of the continent. Here, according to the bank, Société Generale has an advantage over Chinese banks, which are also identifying Africa as one of their major targets. This does not mean that the challenges are not there and collaboration is indeed seen as one of the solutions to operate across an agile and competitive infrastructure.
Marie Cheval, head of global transaction and payment services, says: "In the Correspondent Banking business, the banks you are working with are at the same time a client, a provider, and a competitor as well. Cooperation is therefore key, as the business is based on reciprocity. It also enables us to work together and define standards, to try and harmonise regulation concerning the transaction banking industry."This is a point of view shared by Manfred Schmoelz, head of transaction services in Asia Pacific at RBS, who stresses the importance of relying on open platforms to foster the bank’s business.We want to make sure that our system is forward looking, and adapted to this global world: this means we need open systems. We can see that the world is going in this direction.
"Our clients are working with more than one bank and banks have to compete with each other, creating what is called a ‘shared wallet’. This business is very technology-driven," Schmoelz adds. The conclusion is straightforward: "If you want to be part of the banking group, you have to be open. In some areas, you might not be the best, so you give the service to someone who does it better. And this trend will not stop; because the world is changing, the technology is changing, so in order to stay ahead we have to invest, but we also need a flexible operating model," he says.
Mitigating riskIf partnership is the first imperative, risk management is also on top of the agenda when moving across old and new economies and old and new regulations. Société Generale’s Augé explains how, more and more, reducing the counterparty risk is essential: "We manage to give clients the quality and knowledge of the counterparty risk that we have, in the countries where we are deeply rooted, we also monitor the end-to-end risk and the counterparty risk."
In this area the outlook is optimistic and RBS’s Schmoelz also stresses the improvement of Asian risk profile: "Asia is continuously developing a better risk profile. Many of the Asian multinational companies have done a tremendous job over the last decade to improve their risk management. A lot of Asian multi-national corporations have state-of-the-art technology and ERP systems to support their risk management."
From many points of view, then, the main reality for a global network remains regulation. "We are working very closely with the regulators, engaging with them when we develop new solutions and products, and when clients come to us for help," he says. " We have a very active dialogue with the regulators on developing our brand, our products, and our clients’ business. Of course, the regulations are changing, and that means we have to follow through with a lot of changes some of which, cost money which will drive up operating costs.
"But this is the world we live in, and a consequence of what happened in 2007/2008, so we remain engaged.. Though the situation in Asia is different, working with the Asian regulators is absolutely critical as well," he says.From the point of view of Marie Cheval this is "clearly a challenge" as in some areas of the world, regulatory issues are becoming more and more important. Banks are global organisations, but the challenge is in meeting the requirements of very specific local regulation, and in finding a balance between the specific rules of a country and the needs of businesses to operate globally. An example is provided by the Dodd-Frank Act, being a regulation for the US that can have an impact on banks outside the US.
The importance of speedBeing a global organisation means understanding the feedback of local authorities. However, a global business needs to face this and all aspects involved in the challenge, quickly. The role of the bank in providing a service that accompanies this need is vital. Speed and safety are the drivers of the global challenge for banks and all stakeholders involved, with clients eager to have quicker, safer, web-based tools that enable them access the liquidity no matter the location. With this in mind, IT investments that make it easier for transaction banks to effectively manage a complex network – channelling and rearrange the flows as quickly as possible – are a priority. Société Génerale’s Augé indeed identifies swiftness for treatment of things and safety of processing as the response given by the bank to the competition changing landscape.
RBS core clients are European and to reinvent it self as a partner able to assist its clients it has to meet these requirements.To explain the specific features a European-rooted business, Schmoelz says: "We are structured around our home market, which is the UK, the backbone of our business. Around that home market, we have decided as a bank to have a network, because we want to help our global clients, grow and expand. for example, we can help our global clients expand from their home markets into Asia or Asian companies expand into UK. Of course, we see a shift; today the intra-Asian market is growing strongly. So, yes; it’s happening already that we see a strong engagement on the trade side in terms of trading facilities in Asia than, for example, in Europe. More of our clients are shifting their business to Asia, and we will be there to help them and to capture the growth thanks to our network."
"Many countries are still improving their clearing system, which is the backbone for payments.. Important steps have been taken in the retail sector, because some infrastructure might not be available, so only a mobile payment structure where mobility system allowed the people to access the bank, so it’s more retail-driven. In the corporate sector, I think there are discussions, but for many big corporates the focus is on security, ensuring that transactions are transacted in a secure platform, "So, mobility is clearly a topic, but, at the moment, developments are more retail-based rather than corporate-based. This doesn’t mean it’s not going to change, and RBS is at the forefront of this discussion, but it’s clearly yet an area which needs to be developed."Open platforms, speed, risk management, regulation and innovation: these are is the premise to continue doing business in the global economy.