The GTS Remuneration and Earnings Report 2014 reveals that professionals in trade and transactions services are having to work a lot harder for their compensation, writes Global Trade Search director Sarah Hutton.
Back in 2010, a year after the onslaught of the global financial crisis, Global Trade Search (GTS) conducted a Remuneration and Earnings Survey of the trade and transaction services sector to find out how the sector was compensated and the challenges facing it. Now in its fifth year of publication, we are pleased to present the highlights of the 2014 report, which reflect an industry in flux as it works to establish an equilibrium between service delivery, regulatory issues, market capacity and profitability.
Although trade and transaction services has enjoyed a prolonged period of elevated importance and relevance within banks and the wider market, its emergence from a peripheral financial services product to one that is very much part of the mainstream has come with challenges. On the one hand, more banks have entered the market and built trade and transaction services delivery teams.
However, on the other, compliance and risk appetite constraints have narrowed the range of clients banks can deal with and have added to the cost of doing business, resulting in an over-capacity that is pushing down margins to levels that are unsustainable in the long run. Consequently it seems that the sector is in a continuous state of restructure as banks attempt to re-calibrate their businesses to the inherent tensions of the market.
As one 2014 survey participant commented: “The real difficulty in our business is a race to zero. The competitive landscape is about capture of wallet without a view to actual long-term returns. If this continues I fail to see where returns on the business will sustain the creation of new functionality and compete against new entrants to the market outside the traditional banking sector.”
Within this environment it is hardly surprising to discover that compensation levels have been restrained and that organisations are demanding more from their employees in terms of performance. In this, our fifth, Remuneration and Earnings Survey, we are starting to see some clear patterns emerging around remuneration and that compensation levels between the banking, insurance and corporate sectors are starting to converge.
Year-on-year base salary increases are virtually non-existent and it has become the norm for people to accept internal promotion without any increase in compensation at all. Bonus remains the only way for professionals to increase total compensation and by all accounts these are hard-earned, with only 52% of survey participants realising an increase in total compensation in 2014. Those who earned less than the previous year was sizeable at 18%, while 30% earned the same, suggesting that organisations are keeping a tight lid on employee-related costs and that bonus increases are only really paid out for exceptional performance.
Internal restructurings and the commitment to up-tier the quality of staff in origination, product management and operations has resulted in 33% of survey respondents changing jobs either through an internal promotion, a lateral move or by moving organisations. This represents a significant increase on previous years. Promotions and internal moves remained relatively flat while the number of people changing employer leapt significantly from 7% in 2013 to 12% in 2014. Yet, despite this increased hiring activity, compensation awards were more restrained in comparison to previous years. In 2013 the majority (40%) of people moving to external roles did so for base salary increases of more than 30%. However, in 2014 only 27% of job movers managed to achieve salary uplifts of 30% or more, with the majority settling for less.
Given that the current regulatory and capital constraints are likely to remain permanent features of the financial services landscape, we asked survey participants what they saw as the main challenges confronting the development of trade and transaction services. Lack of experienced staff rather than headcount constraints was frequently cited as an area of concern. This was surprising given that the experience demographic of the sector is heavily weighted towards the senior end, which suggests that the sector may now demand a different type of experience and skill set. In our work as search consultants, business heads are increasingly looking for people with strong client consultancy skills, creativity and stakeholder management abilities to originate, structure and navigate transactions through compliance and risk to meet the business expectations of the client and the institution alike.
As several survey participants noted, origination is a major challenge, particularly in environments where trade finance is not a common product frequently used or understood. In Asia, trade finance is often a lead product, but this is often not the case elsewhere. Consequently, developing the trade product and applying it appropriately is challenging, particularly when there is insufficient differential between the cost of funding for trade and short-term debt funding, making it difficult for bankers to advocate ROE accretive structures that take more effort to execute. Consequently, if credit appetite exists for a corporate customer, there is a tendency to fill customer needs with vanilla debt rather than self-liquidating trade finance structures.
To counteract this, the sector requires people with a high level of origination, client consultancy and internal stakeholder management skills to market a more holistic working capital offer rather than purely pitch a product. Many business restructurings have focused on addressing this issue with a view to maximising the return on a narrower client base as the cost of compliance in terms of staffing, systems and time is causing banks to rationalise their customer base.
ALTERNATIVE FINANCE PROVIDERS
Compliance and regulatory burdens are forcing banks to exit some customer relationships, thereby creating opportunities for the development of the alternative finance sector. As one survey participant noted: “Niche players have always existed to satisfy demand not met by banks. However, the main issue is how large this alternative finance sector is. I believe we have not yet seen the full scale of what it may become,” suggesting that the traditional dominance of the banks in trade and transaction services may be starting to wane.
65% of survey participants considered alternative finance providers, such as invoice finance and factoring businesses, forfaiting companies and specialist trade finance businesses, as providing a viable alternative to the banking sector in the provision of trade finance services. Filling the vacuum left by the banks, alternative finance companies are a viable option for many corporates, particularly with regard to their flexibility to provide bank agnostic platforms, faster decision times and reduced bureaucracy. Many survey participants commented that technology will play a big part in the development of this sector, challenging the banks that are encumbered with lumbering infrastructure that is old, patched together and trying to do too many things. Specialism by the alternative finance sector is allowing them to answer needs with a focused offer at a cost-effective price with efficiency enhancing drivers.
However, the 35% of respondents who were of the negative view pointed to the sector’s unregulated environment, which gives it a temporary competitive advantage, and that many alternative finance providers were not set up to handle the compliance issues and policies which will eventually bind them.
Yet their very existence and growth over recent years suggests that the alternative finance sector will evolve to complement the banking sector and become important market participants servicing those corporates and industries which are no longer attractive to the banks. However, as one participant commented, the alternative finance sector has not been fully tested in a cycle and issues will emerge which will moderate its growth and scalability in the long run.
The renaissance of trade and transaction services was borne out of the financial crisis, while its growth and development over the last five years has taken place during a period of unprecedented regulatory, risk and capital constraints in an economic environment characterised by uncertainty and austerity.
Consequently there have been some setbacks along the way, and for many working within the sector, life has been one restructure after another as institutions work out the most effective organisational structure for their business. Yet, despite the upheaval and uncertainty, 52% of survey participants were of the view that the restructures have made a positive difference to service delivery and profitability and that some banks were now better placed to seek flow business from clients to whom they had extended significant balance sheet.
However, many participants expressed concern that as more banks dedicated resources to developing their trade and transaction services business, the market has become more competitive and hence less profitable compared to a few years ago, thereby making the sector vulnerable. But despite this, the demand for trade finance and related services remains stronger than ever, creating opportunities for non-bank service providers to fill the void, leading to a diversification in the sector which can only be positive for those using the product and those delivering it.