After more than 30 years of Sibos conferences, the annual banking get-together finally comes to the Middle East for Sibos Dubai in mid-September.
In July, GTR’s sister publication EMEA Finance gathered transaction bankers from the region to discuss the development of their market ahead of the event. Co-hosted by EMEA Finance and BNY Mellon at the Jumeirah Emirates Towers hotel in Dubai, the roundtable welcomed bankers from several regional institutions to discuss the growth of the business, changing client demands and the factors that have helped – and hindered – them in their work.
Regardless of the problems that our guests see (and they’re candid about what has held local names back in some areas), they also showed plenty of optimism about the potential of this business. As one put it, “transaction banking is here to stay” – and local and regional banks are demonstrating that they have no intention of letting global firms reap all the benefits from that.
- Bana Akkad Azhari: Head of relationship management, Middle East & North Africa, BNY Mellon
- Majid Husain: Executive vice-president, global FI business, financial institutions group, Abu Dhabi Islamic Bank
- Harshit H Jain: Head, product management, solutions structuring and delivery, Mashreq Bank
- Faisal N Lalani: Executive vice-president, head of institutional and international banking, Emirates NBD
- Raja T N: Head of operations, Arab Bank for Investment and Foreign Trade
- R V A Saleem: Global head of transaction banking, National Bank of Abu Dhabi
- Tim Burke (chair): Editor, EMEA Finance
EMEA Finance: Given that Sibos takes place in the Middle East for the first time this year, there’s perhaps never been a better time to highlight how the regional transaction banking market is developing. Bana, could you start our discussion with an overview of where you see the market in the Middle East? What trends are shaping the work?
Azhari, BNY Mellon: I think the fact that Sibos is having its first annual conference in the region is a great recognition of a trend that we’re all seeing, which is the emergence of local and regional transaction banking and of local and regional banks as powerhouses, whether with respect to trade flows or payment flows. Over coffee I was speaking with some of you about how this industry that we’ve all been in for a number of years has changed, whether in terms of regulation or other requirements – we lived through the financial crisis of 2007 and 2008 and saw a new set of changes and trends as a result, and there’s an increased burden of compliance as well.
It strikes me that transaction banking was once seen as an aside, a conduit, while the focus was on corporate and retail banking. Now I think there’s recognition that transaction banking is actually the area of banking that puts a lot of other things together, so the work has gained importance.
Saleem, NBAD: Transaction banking is not a new concept, of course. If you look at trade flows or payment flows, those elements were all there when the banks started. But what have changed are the delivery channels. We came to transaction banking as a definable business very recently – we formed a department for global transaction banking in 2013. What we’re trying to establish now is the offering of a seamless system.
Azhari, BNY Mellon: So the delivery channels and structure are what changed, becoming more institutionalised?
Husain, ADIB: It’s being managed now, and it wasn’t before. There’s also heightened competition. What’s interesting in this community is that there are more than 100 money changers and I think they do more payment work than most of the banks. They’re expanding, adopting technology faster and becoming more innovative. So what I’m seeing is some of the transaction banking work that banks thought belonged to them slowly moving to non-bank financial institutions. And on the retail side technology such as mobile and internet banking is taking over. But going forward, even the business of the money changers could be at risk if banks play smart and have alliances.
There are changes on the trade side as well. In the Jebel Ali Free Zone, more companies are opening with warehousing capabilities, so you see more trade transactions taking place intra-UAE rather than internationally, because the goods are coming here to a warehouse in Jebel Ali, and are then exported or sold locally. That’s changing how trade is conducted.
Saleem, NBAD: The bank payment obligation [BPO] is getting good momentum now. It’s like letters of credit (LCs) but better and easier to transact. In Jebel Ali now they’re using open account transactions. It’s easier to transact within the free zone rather than with a local LC. It can be changed to a BPO and by using BPO you get opportunity at both ends – seller, buyer and in between. It triggers transaction banking becoming more prominent because of these new ideas and notions that are coming up.
Lalani, Emirates NBD: That plays into an important structural change happening in the GCC. We’re seeing a lot of activity from the China-Africa trade corridor. We as banks are under pressure to serve them, on top of the South Asia corridor that this market traditionally serves.
Azhari, BNY Mellon: Certainly we’re very interested in the trade corridors opening up in the region – we see a lot intra-regional activity. I’d like to talk more about the suggestion that non-bank FIs are competing with banks. Banks have more regulatory burdens with respect to compliance or pricing – even with respect to the breakeven price of overheads. Do others see that in their businesses?
Husain, ADIB: That trend happened in the US, and it’s coming here slowly. In the US the share of financial services for banks has fallen even though the banks themselves are much larger. Mutual funds, investment companies and the like are taking over. We’re following that here. It may take a different shape but it’s happening.
Jain, Mashreq Bank: I agree with the trends you’re talking about. I think that in the time period following the Lehman’s crash we’ve been getting back to basics as an industry – back to knowing what the customers want. The customer is price conscious, and that’s no different when they walk into a bank to send hard-earned money back home to their family. I would dare say that banks are forgetting that they’re in a service industry.
Lalani, Emirates NBD: The space given to the exchange companies was given to them by the banks. There are certain market segments which the banks do not focus on. The role of the exchange houses will not diminish. There will always be a demand for them.
Raja, ARBIFT: It’s a fact that commercial banks can never compete with exchange companies: it’s a matter of cost, the need to facilitate from morning to evening every day, including all the holidays. I don’t think commercial banks should think in terms of taking some share of that.
My bank, by virtue of having ties with Libyan Foreign Bank and Banque Extèrieure d’Algérie as shareholders, representing two countries along with the UAE, has enough business in transaction banking facilitating banks, trade and commercial payments in those countries for business purposes. Libya is rebuilding, for example – they’re spending huge amounts, everything has to be imported, and those payments, most of the time, get routed through a partner bank, so we help them organise the payment. That means we have sufficient business activity. The challenge is that compliance issues are significant.
EMEA Finance: Moving to your corporate clients, how have their demands changed and how has this driven your own work?
Lalani, Emirates NBD: Corporate cash management is where I feel the tectonic plates are now shifting. My view is that if you look at the GCC primarily, the growth in the region is driven by construction and infrastructure development. We see continuing growth in the UAE and Saudi Arabia. We’ll soon see this happening in other markets in GCC.
What is putting pressure on the corporate treasurer today is the fact that most UAE corporates are working across borders within the GCC. Our clients are asking us to handle cash management across GCC currencies, and that’s the key challenge that transaction bankers are facing. Clients are asking more and more frequently for you to pool GCC currencies. You’ve seen international corporate cash management banks develop this, but there aren’t many regional banks delivering that aspect of corporate cash management.
EMEA Finance: So how do you compete with those global names?
Jain, Mashreq Bank: When I came here in 1996 we didn’t really talk to clients about concentrated and notional cash pooling, aggregation and so on because we didn’t want to open Pandora’s box and start offering these services that meant value-add but could destroy profits. We’d wait for a customer to ask for the service before saying we could do it. I’ve seen a couple of things that have really hastened the changes we’ve talked about. One is a greater number of treasurers coming in from the western world who are used to these services and take it for granted that banks would offer them. When they come to their prime bank and the prime bank says ‘I’m sorry, notional pooling? I don’t understand’, they say ‘Get it, or I’ll move to someone else who has it’.
Secondly, banks are no longer just treating it as a defensive mechanism, but want to add it to the armoury so that when they meet a customer that they can offer it should they ask for it, or even offer it as a proactive measure.
Lalani, Emirates NBD: Harshit, one thing that has changed in our mindset is the concept of cross-selling. We no longer want to be the bank providing the asset, while the cross-sell goes to large global players. We continue to develop that and I’m sure that most regional banks are following this concept.
Jain, Mashreq Bank: To return to the question of how local banks compete, what has happened is that a lot of people with foreign bank experience are going into local institutions to help build their transaction capability. They’ve been used to the high-tech products, used to the mindset of the transaction business and the uses of the balance sheet.
Husain, ADIB: But local banks here are not like local banks in other countries. They have no protection at all – they’re like any foreign bank. We have, say, 27 local banks and 28 foreign banks, and they can do everything we can do.
Lalani, Emirates NBD: There’s a natural cycle, I think. It is only a question of time that the regional banks will be able to offer what foreign banks are offering from a cash management perspective. In terms of domestic retail banking solutions most regional players have caught up or do better than global players, in their respective markets.
EMEA Finance: Where do local banks need to invest? Is it just a case of product development or is it also in personnel, as Harshit says?
Husain, ADIB: Local banks have to improve their broader offering. Turkish banks, for example, have been better at competing with foreign banks than UAE banks have.
Azhari, BNY Mellon: What in your minds would be the most optimal way for local banks to address the competition? We can compare with Turkey, but the difference is that even if we restrict the discussion to activity within the GCC we’re still talking about different jurisdictions, regulators and so on. Does the underlying financial infrastructure support local banks, or not?
Raja, ARBIFT: Local banks recently have spent quite a lot to equip themselves with the right technology to offer seamless processes. But for cross-border payments and managing cash, are we looking for banks to own their own in-house systems or for [external] firms to help us?
Lalani, Emirates NBD: Raja, I think local banks are coming close to other banks of the world in terms of technology. They’ve either achieved or are close to achieving a domestic cash solution. The level of requirement to provide a pan-GCC solution, however, is dependent on what your client is demanding from you.
Saleem, NBAD: I notice that. It’s easy to sell cash management to multinationals, but difficult to sell to local corporates, which may still be using paper documents and not delegate power to someone to use a digital signature.
Azhari, BNY Mellon: Given the regulatory requirements and associated cost, we’re seeing a stronger emphasis on fee income and cross sales. Might this end up putting more pressure on corporates to consolidate their business?
Jain, Mashreq Bank: I’m seeing a lot more request for proposals [RFPs] coming in this market than I’ve seen in the past. For me that’s an indicator that customers are saying ‘don’t take my business for granted – I’ll take the best deal that’s there’.
The RFP as a concept is something that, maybe five years back, seemed like only a few multinationals would use. Now large local corporates that have had an influx of corporate treasurers and CFOs from the western world are using it. I read about one treasury team in a local company that has started taking report cards to the banks – they rate the banks on the services they receive from them. An organisation like that is saying ‘in services you’re rated third of 14’ and using that in a very transparent way to say the higher-rated you are, the greater percentage of their business you have.
Sometimes banks don’t look at that from a holistic point of view. You could have a messenger who comes from a client’s firm and is made to wait at the bank for the transaction to be processed, because he’s only a messenger and the relationship manager is busy with some other senior person. But at the end of the day, that messenger has a say in which bank is doing better.
Lalani, Emirates NBD: Isn’t that also a defensive mechanism on the corporate’s side? Five years ago a large global bank, for example, would go to them and say ‘I want your entire cash management [business]’ whereas a local bank would say to them ‘if you’re doing another loan can we put another tranche into it’? Today the regional relationship banker also wants the ancillary business. As a result, the corporate treasurer is under pressure to justify how they distribute their fee-income business, in a transparent manner, amongst relationship banks.
Jain, Mashreq Bank: The companies that are getting into RFPs or report cards more, I imagine they are very aware of the fact that trying to split cash management or trade business among multiple banks is only going to add reconciliation holes and operational inefficiencies at their end. They realise that they have to get the benefits of one bank processing it and being accountable for ultimate delivery.
I wanted to discuss Swift channels. We all know the channels that are there for corporates, but I don’t know how much we actually offer these when we meet companies because there are local proprietary channels the banks have invested money in and they often become the preferred channel they like corporate customers to use. In the past we may have been happy to lock them in, saying ‘this ERP system is stopping my proprietary channel’. We were making it a defensive issue in case our product wasn’t used by the customer because they could have a Swift solution. But today I think customers are saying ‘we don’t want to be handcuffed to you. We don’t want to have an interface that’s of a proprietary nature. We want to give you a file, you take it, put it into the system, and if we’re not happy with the service we’ll cut the link.’
I’ve spoken to people at Swift. Earlier, they were playing the role of not talking to customers directly because they have member banks doing this for them. Now they think the member banks are not doing that as they have their own proprietary, selfish objectives.
Azhari, BNY Mellon: From what we’re hearing around the table, it seems like the local corporate customers are increasing in sophistication, becoming more demanding and putting pressure on the banks with respect to profitability and margin. Then you have increasing regulatory burdens, which also increase costs. How are you dealing with the shrinking margins?
Saleem, NBAD: You address the shrinking margin by cutting each budget in the bank [laughter around the table]. We always fight with the senior management on that.
Lalani, Emirates NBD: Some banks might meet the budget by going down the credit curve. The better way of handling shrinking margins is to focus on cross selling.
EMEA Finance: When you have changing client demands pushing you in particular direction and regulatory pressures, does it feel like your institutions have to take a reactive rather than proactive approach to business?
Lalani, Emirates NBD: The answer is partially yes, and if there’s a feeling around this room that banks are not reacting enough to client needs it’s because of that balance. Banks will work within the regulatory requirements and try to accommodate client requirements within the guidelines given. That’s not just true for us, but also for the global banks, especially those operating in a multiple regulatory jurisdiction like the US and EU.
Husain, ADIB: Here it’s not only new regulation but the fact that existing regulation will be enforced to a greater extent. That’s another factor.
Saleem, NBAD: We are very much in line with Basel II and Basel III, so we feel a lot of challenge now because other banks can quote for a transaction at a cheaper rate. That might make us the losers right now, but in the long term, we’ll be the winners.
Jain, Mashreq Bank: I think that in the UAE we’re catching up with what is happening. The financial landscape is changing fast and corporates are changing too.
Husain, ADIB: One matter in global transaction services is the fee business of banks. At most banks fee income is something like 10% to 20% of revenues, because banks shy from charging for services, worrying customers will go to other banks that are ready to provide them for free. But I worked in Mashreq Bank for years, where the motto was ‘if it’s worth doing it’s worth charging for’.
Jain, Mashreq Bank: I’ve found that the risk element has come more on the radar of corporate treasurers, as has the fact that transaction services can help to minimise risks. This is a market in which you have the phenomenon of blank signed cheques. The client says he’s happy using that – then you have to highlight the risks of using those; of, for example, an extra zero getting added accidentally.
Husain, ADIB: But then he says he’s been using them for 50 years without a problem [wry laughter around the table].
Azhari, BNY Mellon: Do you think the heightened awareness of risk is helping local banks to unbundle the fee or pricing components?
Jain, Mashreq Bank: It’s a bit like the controller for a Sony PlayStation – you have a lot of a buttons and combinations to push them in. Is it the cost part bothering the customer? Is it the risk? The turnaround time? This is not a market that thrives on good supplier relationships. Our Mena customers might say ‘I don’t make the payment until the supplier calls me three times’. Things have started changing because people have realised the supply chain management has to be better.
EMEA Finance: We’ve already mentioned the changing delivery channels for banking – what further trends can we expect here?
Jain, Mashreq Bank: We are one of the two countries in the world that has the highest level of mobile penetration. Some people would leave home without their wedding ring but never their phone – I find that mobile is being seen as a retail channel. Is it time for us to develop this as a B2B channel rather than having customers go to Swift or a proprietary platforms to initiate a transaction?
Azhari, BNY Mellon: Throughout this discussion we’ve touched on the role of technology and the different times at which it’s been seen as a way of combating regulatory requirements or cost requirements. How do you see its role in the market here? Are the markets more traditional than the west? Are technological investments important, and how are corporates adapting to that?
Raja, ARBIFT: Take an area like fraud protection – you can get an SMS alert [for unauthorised activity on your card]. And the younger generation in the UAE will do so much with technology. There’s an opportunity to capture that.
Husain, ADIB: And what do the banks get out of it except, in the case of the SMS alerts, the prevention of fraud? There’s no fee charged for it?
Raja, ARBIFT: It’s a comfort to the customer – and some banks charge for it.
Jain, Mashreq Bank: We have customers signing documents and sending instructions via fax. Some banks have said ‘faxes can be dangerous for you, we’ll stop accepting them’ – you want the customer to use a more secure electronic channel. Our bank has still kept the fax option open because there will be some customers who are important but, as much as we try, won’t move to an electronic channel. We don’t want to lose them, so we keep that option open for them. Similarly, there may be select people today comfortable with doing their transactions on the mobile. In time they may become CEOs of companies and will remember Mashreq as the bank that offered them that first. It’s like their first love!
Saleem, NBAD: That will happen. A new generation of executives will come.
EMEA Finance: Let’s close with some thoughts on the outlook – what will change in this market over, say, the next year? What would you like to achieve or see happen?
Lalani, Emirates NBD: It’s maybe a little unfair to ask for predictions about the next 12 months, but let’s look at the next five years. The dominance of foreign banks will continue to diminish and the space thus created will be filled by the regional players. I believe that and I’m sure the foreign banks are conscious of that as well.
The retail space is already up for grabs, whereby the foreign banks are no longer playing a dominant role. Local banks are quite sophisticated there and that’s the way the cycle moves in every market. One year is too short a period to change, but in the next two to five years the footprint of the regional banks will continue to grow.
Saleem, NBAD: What do you think about transaction banking itself in local banks?
Lalani, Emirates NBD: Transaction banking will have to evolve. Banks will have to go back to basics and execute that extremely well, a good transaction banking platform is now part of that requirement.
Saleem, NBAD: I have the same feeling. Transaction banking will play a vital role in establishing relationships with clients.
Husain, ADIB: Banks are in a comfort zone at the moment but the competition, either from foreign banks or non-banks, will force a change. I see most of the cash management and transaction banking offerings at the moment are for big corporations, but if you see the SMEs, a large segment of the business community, people are either not focusing on it or are doing so haphazardly. There was a time when SMEs in Abu Dhabi would come [to Dubai] and say their own local bank didn’t want to talk to them.
EMEA Finance: Isn’t that a short-term view if we consider that some of the smaller companies today could become giants given the time and support?
Husain, ADIB: Well, the banks would have taken the view that this is very small, unproductive, difficult to do and costly – and won’t make me much money. But what about the average size of a credit card transaction? Companies can make billions of dollars there. Banks have to learn how to do something similar, and that’s where the role of technology will come. At the moment technology is driven by banks’ own needs in processing, not how to help customers – that too will change.
Raja, ARBIFT: There is more of a push towards the SME market now in the region, some of which is coming from governments.
Husain, ADIB: And for the big corporates, the capital markets are taking over. A big corporation will go to the capital market to raise money directly rather than borrow from the banks. They’ll look to sukuk and bonds to make their money.