Ecosystems drive growth for Banks in Asia
Banks’ expanding ecosystems create opportunities, business leads
FOLLOWING the company’s listing back in 2014, Alibaba Group Holding founder Jack Ma referred to the company as an “ecosystem” 24 times in an internal memo addressed to employees. The concept of ecosystem and its potential to create new business opportunities have since been making its way into banks in Asia, in particular, the transaction banking business.
Banks are looking deep into their own client base to create business opportunities. Among other things, they match clients within their own ecosystem with services from another division of the bank. For instance, connecting investment banking clients with transaction bankers.
Global banks, such as HSBC, Standard Chartered and Citi, leverage their global ecosystems and connectivity to provide unique solutions to clients.
At Standard Chartered, the bank is able to leverage their extensive Asian operation to provide solutions to foreign clients looking to enter the region. For example, Swiss elevator maker Schindler Group has been using Standard Chartered’s cash collection solution via a partnership with messaging firm WeChat in China. Schindler uses a QR code for payment requirements.
Further, banks are also able to offer advantages to groups of clients that exist within their own ecosystem. This is similar to how some telecommunication providers can facilitate cheaper calls between customers that are within their own network. In transaction banking, with the growing use of distributed ledger technology, banks are able to quickly move cash across borders for their clients if they are within the same network. For instance, Axis Bank, Standard Chartered and Rakbank all use RippleNet to send live, fast, frictionless cross-border payments within the Ripple network. As such, clients benefit from being part of the ecosystem. Similarly, China Merchants Bank is also able to achieve real time cross border transfers within its own banking network using blockchain technology.
Another way banks exploit their existing ecosystem is through the use of technology. Singaporean bank DBS, for example, uses big data about existing clients to understand their needs and offer targeted solutions. By developing new business relationships from existing clients, local banks are able to reduce the cost of acquisition of new customers and quickly scale up the customer base. “Using big data, we can better target customers as well as provide solutions to address their pain points,” says Piyush Gupta, CEO of DBS in an interview with The Asset.
“We want to create an infrastructure that helps connect the trading community in both Hong Kong and Singapore and bring them all together through this network. These stem from our focus on the broader ecosystem,” says Gupta.
To illustrate, transaction banks are not only able to serve buyers with supply chain financing, but also introduce and onboard suppliers who are within the banks’ own network to the existing programme. Whenever a bank identifies an eligible supplier in its banking network, the supplier will be informed that they are able to join the existing supply chain finance programme where suppliers are able to enjoy quicker financing and lower cost of funding.
“There is an ecosystem of suppliers and buyers. But we also see industry ecosystem where it becomes much broader, buyers, suppliers and other participants in the industry,” says a managing director at an international bank in an interview with The Asset.
Apart from the two arms of the supply chain, third-party insurance companies such as Sinosure or Bank of China Insurance are also introduced as key export credit agencies in the ecosystem to provide trade insurance products to exporters.
It is now up to banks to develop their ecosystem and follow the business development of key clients as they expand their business abroad. “In many ways, it is where the next generation of transaction banks will go. Typically as banker, this is where we are disrupted. We focus on financial flows, but financial flows are a result of business flows,” says the managing director. “We are moving towards or even with the clients with the business flows..”
The link between transaction banks and investment banks has become closer over the past few years, leading to cross-selling opportunities. Transaction banks are able to leverage the relationship investment bankers have with their clients. With billions of funds raised by Chinese corporates overseas, this has provided transaction banks with the opportunity to play a critical role in cash management.
“A lot of Chinese companies migrate a large number of their trade flows through Hong Kong. Whether they came to Hong Kong for equity financing or debt financing before, now it is not just capital markets. It can be [for] trade and cash,” says a transaction banking head based in Hong Kong.
Moreover, since late 2015 the Hong Kong government has been pushing its corporate treasury centre (CTC) policy and encouraging Chinese corporates to set up CTCs in Hong Kong, which also provides opportunities for transaction banks to act as advisers to Chinese corporates who are looking to set up a CTC.
“Their (Chinese corporates) sophistication level is different from normal European and US MNCs. So, there is a great chance for us to play that advisory role,” says the transaction banking head.
In China, joint stock commercial banks were, in general. earlier movers in transaction banking when compared to state-owned banks. China Guangfa Bank benefited from the experience of its former shareholder Citi and set up its global transaction services in 2012. China Merchants Bank set up its transaction banking division to integrate cash management and trade finance in 2015. State-owned Agriculture bank of China set up a transaction banking department in the second half of 2017 under its corporate banking division.
Despite historic Asian G3 bond issuance and fee income in 2017, intensified fee competition requires banks to find creative ways to further improve their profitability. Traditionally, corporate CFOs and treasurers put their liquidity into safe investments such as bank deposits or Treasury securities. Yet, Chinese banks or securities companies are offering corporate wealth management products which can even invest in equity or structured products with longer maturities.
On top of traditional short-term investments, some aggressive Chinese corporates choose to make riskier investments such as IPOs as cornerstone investors. In 2016, Postal Savings Bank of China’s Hong Kong IPO had several cornerstone corporate investors with robust liquidity such as Shanghai International Port.
“It is getting harder to do business, although the market is hot,” an executive at a Chinese securities company based in Hong Kong tells The Asset. “For example, some large Chinese banks, as issuers, did not pay any fee to investment banks, as the issuers believe that showing the underwriter’s name on the term sheet is a reasonable return to the investment banks.”
In a bid to offset the reduction in underwriting fee income, investment bankers have started to focus on cross-selling to issuers. According to the banker, one of its Chinese state-owned clients raised millions of dollars in its debut US dollar bond in 2017, and then invested some of the proceeds in Hong Kong IPOs. Although the issuer only paid minimal bond underwriting fees, the IPO investment made decent profits for the securities company.
The important role large technology companies play in China has also affected the banking ecosystem. Chinese banks have typically sought to deepen their ecosystems through partnerships with technology companies. This strategic partnership enables Chinese banks to expand their client base using the technology companies’ client network. Four Chinese state-owned banks have formed partnerships with China’s top technology companies: Baidu, Alibaba, Tencent and JD.com (collectively known as BATJ). Suning Group, one of the largest Chinese retailers, recently announced a strategic cooperation with Bank of Communications.
In addition to expanding their ecosystems, these partnerships also strengthen the technology capabilities of Chinese banks. For instance, China Guangfa Bank worked closely with WeChat and Alipay in its cash collection solution, which enables SME merchandisers to collect mobile payments with one single QR code. In the past, SME merchandises had to use two separate QR codes from WeChat and Alipay.
“Globally, as Chinese banks start to go abroad, they are potentially a major competitor to us,” says a senior executive at a global bank in an interview with The Asset. “However, they do not have the connectivity that we have.”