Banks must confront regulatory backlash	Related links: Big issue debate 3: Will transaction banking be the engine for sustainable growth?
Collaborative solutions are needed to tackle regulatory and cost pressures

Left to right: Francesco Vanni d’Archirafi, Citi, Catherine Bessant, Bank of America, Andrew Long, HSBC, Werner Steinmueller, Deutsche Bank.

The transaction banking industry must engage with regulators to limit the scope for adverse rule changes influenced by a populist, post-Lehman backlash against the finance sector, according to panellists at Wednesday’s Big issue debate, ‘Will transaction banking be the engine for sustainable growth?’

In the week that marks the first anniversary of the collapse of Lehman Brothers, transaction banking executives were united in their view that over-regulation threatens their ability to deliver profits to shareholders and high-quality services to clients. The cost of regulation – added to reduced profitability caused by low interest rates and GDP growth – was also seen as contributing to the industry’s move toward greater levels of inter-bank collaboration.

Andrew Long, Head of Global Transaction Banking and Group General Manager at HSBC, said banks “should not be frightened” of talking to regulators.

“My concern is that regulation will be increased, driven by politics and emotion, with a lot of unintended consequences. If we’re not careful, the cost and confusion will outweigh the benefits,” he said, adding later, “We need to be on the front foot, not the back foot.”

More regulatory coordination is needed to cut the cost of compliance, suggested Werner Steinmueller, Head of Global Transaction Banking and Member of the Group Executive Committee, Deutsche Bank.

“We have European initiatives but we don’t have a European regulator,” he said. “The Payment Services Directive is a European initiative, but individual countries are allowed different laws and interpretations. A European or even a global regulator would help us to standardise and save a lot of money.”

A key challenge, said Catherine Bessant, President, Corporate Banking, Bank of America, is to engender a greater understanding of transaction banking among regulators. “How we do what we do is a mystery to the people that are trying to regulate us,” she said. Bessant added that the threat of potential trade wars between countries trying to protect their own economies and industries “is a very significant issue that scares me to death.” Banks needed to show a resolute and united front, she insisted, to prevent an increase in protectionism that is both “unnecessary and unthinkable.”  

Scale, leverage and cost

Francesco Vanni d’Archirafi, CEO, Global Transaction Services, Citi, said that the regulatory and economic climate would push the transaction banking industry to collaborate further. “I use scale providers where I can benefit my clients by having scale that I do not have in my business,” he said. “Equally, domestic and regional financial institutions can leverage my network.”

Bessant pointed to Bank of America’s joint venture with fellow US bank Wells Fargo to operate a combined automated clearinghouse platform, as a further example of the willingness of banks to collaborate. “We found ourselves with a need for innovation and scale, but also a need to reduce unit costs,” she explained. Bessant said the complexity of collaborative efforts should not be underestimated. “We spent a lot of time distinguishing the areas of differentiation in which we have to be separate so that our clients can determine whom they want to use, from the areas of leverage, where we achieve more by working together,” she said.

Deutsche’s Steinmueller said that cost pressures had led a large number of banks operating in Germany to collaborate on the processing of seven billion local payments. Scale, he said, was the only appropriate response. “We have to work together on new efficient solutions, otherwise we will not be competitive,” he asserted. “Pricing in transaction banking is not going up.”

Having already outsourced low value clearing in Germany and lockbox services in the US, Vanni d’Archirafi said collaboration had to overcome longstanding competitive barriers. “When our current clearing contract in Germany is up, I would have no problem saying to Werner, ‘If you give me a better price, the contract is yours’.”

The reduction of duplicate processing should also extend to compliance efforts, suggested HSBC’s Long, particularly given the disproportionate burden carried by smaller institutions.

“Collaboration is very sensible because at the moment we all spend exactly the same amount of money filtering exactly the same payments against exactly the same terrorism lists,” he said. “Regulators tend to think that banks make so much money that compliance shouldn’t be an issue. They often forget that smaller banks have to invest the same amount of money in their systems as we do, but for them it’s a much higher percentage [of overall costs].”



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