For a time, the global expansionist policies of the major banking groups appeared to weaken the rationale for the banking club. However, as certain banks have scaled back their international ambitions, the appeal of being able to continue to offer services in locations where they no longer have (or never had) a direct presence has become increasingly evident.
Looking at the main banking clubs, Unicash and Unico are more Europe/Americas focused, whereas Bob Lyddon, General Secretary of the International Banking Association (IBOS) explains that his membership extends beyond Europe and the US into Mexico, Brazil and Chile, covering approximately 80% of Latin American GDP. Connector and TES are also starting to cover Asia Pacific and the Middle East, but still have more work to do to achieve significant coverage and access, says Capco partner Bernd Richter. “Part of a banking club’s offering (and value for its members) is to provide access to branch infrastructure in a target country for services such as cash collections, account opening/identification support or other services that require local physical presence. These services will not become obsolete, especially for banks in a competitive world where money transfer agencies are growing.”
With European and North American companies doing more business than ever in emerging markets, there is increasing demand for banks to have solutions which enable them to support their clients internationally. It is therefore important that the existing banking clubs extend their coverage across Asia, Latin America and Africa says Stephen Everett, Managing Director of segment propositions at Lloyds Banking Group, which is a member of both Connector and Unicash.
He also sees the clubs evolving from largely referral-based arrangements to stronger alliances along similar lines to the Oneworld airline alliance, a virtual network where it is not just about referring a customer to a known contact but more about what that bank can do to help the customer set up their international business and deliver products and services that are consistent with their home market.
Alliances are attractive since few banks can justify having their own network (unless they have scalable retail and mid-market businesses in the country) given the cost of running technology, connecting to the local clearing systems and meeting local capital requirements. “These factors, coupled with differences in regulation around customer identification and anti-money laundering legislation, mean the costs of maintaining this infrastructure will lead to increased demand for co-ordinated partnering via alliances, rather than through multiple bilateral agreements,” says Everett.
Richter observes that bilateral agreements (correspondent banking) are still an important part of the corporate banking world for payments, cash management and trade services. However, he describes banking clubs as an attractive alternative to operating full blown bilateral agreements with the associated complex legal paperwork for covering countries with only occasional flows. “Ongoing M&A activity between banking groups will drive down the addressable space for banking clubs, but they still have room to grow and add value. From a geographic coverage perspective, they create more opportunities for banks to join rather than to manage bilateral relationships independently,” he notes.
To a certain extent, non-bank service providers (such as Earthport) have targeted some of the product and services spaces of banking clubs and financial technology companies may provide other parts of the solution in the near future, Richter adds. “From a banking club perspective this can be seen as a threat or as an opportunity to co-operate with these innovators to enhance the existing banking club franchise.”
Ruth Wandhöfer, Global Head of Regulatory and Market Strategy, Citi, observes that bilateral arrangements have become more common in recent years. “Given some of the major changes on the regulatory and infrastructure side, more bilateral arrangements and partnering has been taking place as individual institutions have reviewed their business models and non-core activity has been outsourced. This trend is likely to continue for some time until the regulatory reform has settled.” However, she also feels that the role of the banking club with a slightly broader focus on all payment service providers continues to be very relevant.
Lyddon refers to the retrenchment of banks running their own networks “to the extent that there appears to be quite a common earnings requirement that each link in the network earns $25,000 per annum, which can be difficult to reach when the network bank’s service offering may be quite limited in certain locations.” IBOS banks are full-service banks and so have a business model that can accommodate the subsidiaries of medium-large parent companies, whereas network banks are concentrating only on the very largest, he continues. “This can give rise to a situation where one part of a network bank is proposing its own network to its largest clients and a different division is proposing IBOS to the medium-large customers.”
He accepts that the number of bilateral arrangements has risen but suggests that the substance of such arrangements varies widely, from agreements to exchange MT101 messages for an individual customer all the way to integrated IT solutions involving reference accounts. “Each step along the way differs. Reference accounts have the advantage of quicker set-up and single point of customer service, but then you have the drawbacks of a very limited local service range, no local relationship manager/customer service and no access to local credit products such as card, direct debit origination and loans.
“It can work well for certain types of very centralised customers but is not a panacea. It is also expensive to establish and is usually constructed on a one-way basis: a global bank engages a partner, who invests heavily on their side in the expectation of large volumes.”
Lyddon says his organisation is sceptical as to whether the efforts of the financial institutions teams of many banks trying to set up bilateral arrangements are a response to real volumes or to a desire to have ‘flags on a map’.
“IBOS works to a service template, with sets of capabilities stated as requirements to back up each of the value points. Our aim is to enable member banks to help their customers in other countries; the service has to perform on some real basics, without which you never get as far as delivering intraday and previous day reporting, MT101 services and cash pooling. Looked at from the point of view of the introducing bank, they need a system that will respond when they have a client who needs an account and services.”
Rather than diluting the value of the banking club concept, he suggests that mergers, acquisitions and partnerships have enabled IBOS to expand its network through the existing members as an alternative to testing the governance model by engaging with many more individual banks to obtain the same coverage. M&A activity by KBC, Nordea, UniCredit and Santander has added 14 banks to the list of IBOS associate members.
“On the other hand, member banks may have viewed IBOS as a stopgap along the way to having their own comprehensive network whereas, thanks to retrenchment in the industry, IBOS offers coverage of areas for which member banks will not have coverage themselves within the foreseeable future. “Indeed, they may sell off an interest and then it is very convenient if the bank from which they have divested remains in IBOS, so that existing customer business can be managed via the network instead of via their own network. That in turn can mean that the business is managed from the same team with minimum disruption.”
According to Richter, initiatives such as SEPA have not diminished the value of the banking club concept, while Lyddon observes that significant countries and even regions of Europe remain outside the Eurozone. “The line of business that has become far less important is non-resident accounts for local collections – that requirement can often be satisfied with just one euro account in the SEPA area rather than one in each country. However, there are still the non-euro countries: the UK, the Scandinavian countries and several in Central and Eastern Europe.”
The shrinkage in non-resident accounts in euro within the SEPA area is offset by the continuing need to hold in-country accounts for resident entities, he continues. “Considerations around tax, business model and decentralisation still leave a market requiring international banking services and, while there is a trend towards centralisation and to emulate the shared services models of very large companies, it is noticeable that medium- to large-sized companies remain quite decentralised.” Lloyds Banking Group sees itself as having an intermediary role to play between the local partner bank and the customer, says Gavin Maclean, Head of Payment Product.
“We will facilitate the account opening process and this can save the customer a great deal of time. It will be very obvious to the customer that we are working with the partner bank and this is important because the customer is entering a legal agreement with that bank.”
Banking clubs have created sophisticated but standardised process handling interfaces between remote initiating banks and the branches of a foreign bank executing locally and the same principle applies to the handling of AML rules, adds Richter. “Banking clubs are already benefiting from exchanging KYC and AML data for on-boarding purposes. They are impacted by these regulations, but can better share and help clients to keep the effort of account opening processes in the club to a minimum.”
Ulster Bank made the decision to become a full member of IBOS two years ago, having been an associate member for a number of years before that explains Lisa Taggart, Relationship Director Corporate and Institutional banking. “A lot of the activity we see from IBOS is on the inbound side, particularly for US companies locating in Ireland who are banked with US financial institutions that are not network banks. For example, we regularly work with customers of Silicon Valley Bank to offer them local services and would have weekly calls with the bank to discuss implementation plans.”
As part of RBS, Ulster Bank customers are part of a network that can provide local banking services in many countries outside Ireland. But when an RBS branch is not available in a particular country, Taggart can tap into IBOS and her customers benefit from a level of standardised account opening procedures and established relationships. Therefore, the experience of opening an account becomes more akin to the process that exists within the RBS group.
As the larger network banks may have differing criteria for what type of customer and level of business they are willing to take on, she says membership of a banking club ensures her customers can access full-service banking that is appropriate for their size and growth potential. “This is particularly important for companies that are just starting to trade abroad and have a business plan that might involve testing the market for 12-18 months on a modest scale. It also represents a valuable added service for us in terms of customer retention, especially for corporates who require access to the local clearing system in countries where RBS may not have a presence.”
As an IBOS member, Taggart can certify documents for her customers that are accepted by other banks and likewise Ulster Bank accepts documents certified by other IBOS members. “Having a list of authorised signatories for each bank removes the need to engage notary publics or independent accountants and therefore speeds up the account opening and customer identification process. This is one example of how we do everything we can to behave like a single entity.”
More to give
She is convinced that banking clubs will become more relevant. “A lot of work has been done in the last few years within the IBOS banks around streamlining the KYC process, for example. Now these processes are approved and implemented, the number of customers referred to us and the number of customers we refer to other IBOS members can increase.”
This trend will be further boosted by network bank retrenchment, she concludes. “It is evident that network banks are focusing more on their core markets. While bilateral agreements will continue to be reached, our preference would be to further grow the number of banks within IBOS, given that we have tried and tested procedures in place.”
Lyddon acknowledges that banking clubs have been impacted by anti-money laundering and ‘know your customer’ regulations, but adds that the workload has increased for all participants in the banking industry. “The need to do these checks in each location is one of the reasons behind network banks wanting to earn $25,000 per location. The IBOS approach has been to try to maintain a consistent process even if specific documentary requirements for each bank initially diverged. Our observation is that the requirements are starting to converge again thanks to FATF 2012 recommendations.
“The IBOS approach is to have designated contacts at each bank, a consistent method of initiating a referral and finding out whether it is ‘go’ or ‘no go’, full visibility of what the documentary requirements will be for a particular bank and a consistent method of working through the process, backed by escalation procedures. But we cannot have just one account opening document for the whole network.”
The key question, according to Lyddon, is whether this can add value to the banks and the customers when network banks will only take very large customers into their network; many local banks have stopped doing accounts for non-residents or even residents who have foreign beneficial ownership; and many banks have been clearing out smaller customers or requiring very high monthly account opening fees.
“For a treasurer to try to set up banking remotely in a new country, the fall-back of selecting a local bank themselves in each country has declined due to the ‘foreign beneficial ownership’ issue. Then the option of using a network bank may not be there if that network bank has retrenched or if the customer falls below the threshold. So KYC is in a way an opportunity for IBOS as, within what is a network of trusted third parties, each bank can trust the authenticity of the documents sent by an IBOS partner.”
The ability to offer clients specific liquidity and cash management structures across a set of countries and regions, combined with the ability for local cash collections and remittances, drives the value of clubs, adds Richter. This enables their members to offer these services at a competitive pricing point and compete against large global network banks.
According to Lyddon, it is a commonly held misconception that banking clubs cannot offer cash pooling. “IBOS has offered a same-day value overnight cash pooling service since 2000 (in euros) that moves the entire available balance in the ‘slave’ bank and transfers it to the ‘master’ bank,” he concludes. “We have more than 200 customers using this service.”
In short, banking clubs have evolved significantly in the years post-crisis, and are arguably more relevant than ever.