How best can banks support their clients in expansion mode? Do banks build, buy or ally to align with client needs and ambitions? J.P. Morgan gathered leading bankers to debate the drivers, challenges and best
practice behind financial institution partnerships.
Jonathan Heuser (moderator), regional head of trade advisory & solution delivery, J.P. Morgan Treasury Services
Masahiro Goda, general manager, Asia, global trade finance division, Mizuho Corporate Bank
Michael Hogan, head of trade, Asia, National Australia Bank
Lim Hon Theng, head of trade operations, Asia Pacific, J.P. Morgan Treasury Services
Abdul Raof Latiff, managing director, regional executive, Asean, J.P. Morgan Treasury Services
Lum Yin Fong, managing director, global transaction services, DBS Bank
Adesh Sarup, head of trade & supply chain, Singapore, ANZ
Sanjeev Sharma, head of FI/NBFI sales, Singapore, J.P. Morgan Treasury Services
Heuser: Does each of your banks have an established policy on partnership or outsourcing? If it does, how does that impact the trade business?
Lum: At DBS there's no established policy. As we expand, we realise we are very much an Asian bank and that, in certain markets, we have no branch network. We are in discussion with J.P. Morgan to see how we can use our partnership to expand not only trade but also cash management across the network. So partnership is on an as-needed basis. We figured that, to support our customers, many of who have expanded overseas to places we don't operate in, an alliance with a reputable bank like J.P. Morgan was very important. In the alliance that we had we started with cash, but we did not stop there: there was a lot of trade too. J.P. Morgan has a lot of access to US buyers and corporates, unlike us. Certainly, in Asian markets we are very big with local corporates and SMEs. I believe that it will really work if we can do it together.
Hogan: NAB has no partnership policy as such. There is no central area driving partnerships. Given that the business is multi-faceted, multi-geography, multi-client and multi-product, there is no single way of buying anything. The business drives the request and the need, but sitting behind that is a strong procurement area that allows people to make the right choices and takes them through a proper due diligence process. It does not tell you what to do, but in terms of how that selection procedure goes through, there is a very well-established procedure that says: 'If you are going down this road, we will help you go through it.' You make the decision for yourself but are taken through the process by a well-established team who does that day in and day out for different parts of the bank. We might need to partner in trade more than in payments or investment banking, so the business has to come up with the requirement, but once that is established there is a lot of support internally to help that.
Heuser: Having that support infrastructure can be helpful, contingent upon it being flexible enough to accommodate the specific need. That is one challenge: there is a procurement process that provides due diligence and support, but it may not be flexible enough to fit specific requirements. Having the criteria and process is very useful, as long as they are able to accommodate the needs of the business.
Hogan: Absolutely, but what it does not do is allow or require individual business units to make up their own way of doing evaluations. It provides a really good framework. Whether it is trade or payments, it takes you through to make sure not just that it is efficient, but that it is open and transparent and that there is a good audit trail supporting it.
Sarup: Partnerships are driven by business requirements and opportunity. In some cases, it could be the needs of a select group of clients; in others, it is more scalable and there is a larger business case to explore something the bank cannot do itself through its own network or franchise. While there is no stated policy, business needs and demands determine the direction. There are certain premises on which all partnerships are based: first, there has to be alignment of understanding and objectives between us and the intended partner; second, that agreement or partnership can change and, if it needs to be reevaluated, there are options to do that. Often, franchise growth of different organisations may make that partnership non-tenable in the future. When these basic premises are established, that determines how the discussion moves forward.
Goda: We recently expanded our network in Asia to support Japanese corporates' production or distribution networks. Of course, there is a limitation, and partnerships are very important. It depends on how deep the relationship is, especially with banks in the region. Particularly with banks such as J.P. Morgan, it is more on the hi-tech side. Another type of partnership is a local one. We are not in the retail business, other than with ANZ. We are only in wholesale banking, but we have to support clients in the region, so we have partnerships with banks in Vietnam, Korea and India.
Heuser: Some look at partnership as an outsourcing exercise, as a way to save on cost. Another way to look at it is a way of capturing customers, providing expanded service to an existing client base, or even getting new products into a market more quickly.
Sarup: Both of those can be drivers for pursuing that route. Cost savings and a more efficient way of providing a solution to clients certainly drives the business. Client demand for trade, payments and cash solutions is broadening, and corporates who have ambitions to be regional players are looking for their primary banks to assist them, not just in the franchised countries that the bank has, but beyond. Delivering a uniform solution in this manner is an important component of the entire solution coming through for the customer.
Heuser: Goda san, in terms of the way one would look at partnership - whether to manage a business more efficiently or to expand - would your approach to that vary depending on whether we were talking about your home market versus branches or offshore markets?
Goda: The Japanese market is not monopolised by Japanese banks. In terms of the overseas market, we have to think about as many things as possible. Our network is quite limited, however, we have to survive and to support our customers. Our challenge is how we support our customers, even though we do not have our own network worldwide. Japanese multinationals are looking for efficient cashflow and risk management and their business is expanding.
Hogan: I agree with Goda san. We would probably not go into an agreement in Australia with another bank, given that we are an Australian bank. If clients have overseas requirements that we cannot cater for at home, we have to find a way of doing it. We can either do it ourselves or with somebody else. The more embedded they are in an overseas market, the less likely we are able to do it ourselves. Once you establish that there is a need to provide it, you need to get to the next stage of how you provide it. Otherwise, somebody will provide it for you overseas, which could be the thin end of a wedge that comes back to your home market and starts encroaching. That is a proactive defence. It is client-led.
Heuser: If it is client-led, how difficult is it to coordinate that approach across different disciplines or product areas?
Hogan: It can be quite difficult. If you take the lifecycle of a client, as soon as they go overseas they might generally be a bit smaller, but they require a single bank to provide a full service. As they grow, they can start doing multibank business and having specialists doing each element of that, but it is tricky. I do not think many banks have prescribed ways of doing it. It is 'learn-as-you-go' and there is no DIY manual for it.
Heuser: Adesh, what do you think about that home market question? There will typically be a different approach or strategy; to what extent is there flexibility for the overseas branches to come up with an independent strategy, and how closely does that have to be synchronised with the head office's philosophy about who is and is not a competitor?
Sarup: The country office/regional office/ head office dialogue and consultation is vital. As we look to growing our franchise across the region, it is important to be closely aligned with the head office on such matters in order to make a long-term decision. The appropriate way is to have that active consultation on whether to build or ally. What is the size of the business, what scale can it possibly give us in that market, and does it merit that investment?
Latiff: It is a similar story for J.P. Morgan. We do not necessarily look for what we need to do from a partnership standpoint in the US, but at what is in the interests of clients globally. The partner needs to understand the business objective. When you have business objectives understood by two parties around how we want to go there and the type of customers and services we want to offer, there is a better understanding around how to meet those objectives. In that way, partnerships have been very successful. One key driver on the partner side is the business objective of time to market. You cannot do everything yourself because you do not have the scale. You work with a partner who has a centre of excellence and the partner can bring everything necessary together to get the franchise going.
Heuser: How would you see a partnership working in terms of enhancing your ability to do more business with your core target clients?
Sarup: There are several methods that can be deployed. A more obvious one is markets in which there is no franchise, so working with a strong partner bank in extending that proposition to a core client is the solution. Another aspect is working with partner banks where you might already have a franchise but not in every part of a large country. For example, in China where there are possibilities of working with a partner bank to extend your proposition into areas/provinces where you do not have your own branches. On the flip side and with business reciprocity we would look to support clients of partner banks in our franchises where they may not have a presence. In the world of trade, such reciprocity lends itself favourably to several cross-border solutions.
Hogan: Rather than just processing and efficiency gains, the world is probably moving to a place where it is more about the credit and risk sharing. Adesh mentioned the cross-border supply chain. Not everybody is everywhere, so while I might have some large Australian retail stores, they might have multiple suppliers in China, for example. It is not likely I am going to be able to bank them as efficiently as a local bank there, so teaming up to do the buyer financing or the supplier financing across predetermined transactions is one area. There is an aspect of credit and financing which comes into play. Further down the line are implications of Basel II/III, where it is not just a question of taking and holding risk now. Banks will have to be more nimble in their balance sheets. You have leverage, capital and liquidity ratios, so for things I might have taken on and held myself, I am going to need a good banking network I can work with to share some of this risk with. Banks will have to be more flexible because while it might suit one ratio, certain pieces of business might not suit another. From an Australian point of view, many commodities we are dealing with have very high values. In a few transactions, all of a sudden, you are dealing with very large tickets. We would start to look at sharing that around, because I do not think Basel III will allow banks just to take and hold. Without forgetting back-office outsourcing, there is increasingly a shift towards the middle and front office.
Lum: We are expanding aggressively in Asia to be the Asian bank of choice for corporate customers. Certainly, in markets where we are not present, alliances are useful because we can work with our alliance partners to support our customers. as they expand into these markets. We want to deliver both cash management and trade finance to our customers even in these markets. We started off with cash, because it is more critical. Trade will be the next area that can be looked into. We can also benefit from synergies and economies of scale that have been built up by the alliance partner, which then will help us in terms of productivity and efficiency in delivering services to customers. Leveraging on better economies of scale and efficiencies, we have centralised our product management/development as this will enable us to have faster time to market and ensure that we can easily replicate our capabilities across the network. However, in certain markets, for example in Indonesia, we may have 40 branches and we are still small compared to some local banks. To enable us to better support customers in this huge geographic space, we need alliances, especially in the area of cash and cheque deposits.
Heuser: How do you consider who would be an appropriate or non-competitive partner; someone able to provide the services you need?
Lum: We have a checklist of requirements and we know what we need from our alliance/partner banks for both cash management and trade finance requirements. We work closely with our internal FI team to identify those banks that we could be working with in an alliance. With the banks identified jointly, we articulate clearly in writing and spell out our requirements for both the products. We then issue an RFP to the identified banks. Once the proposals are submitted, we are able to determine which of the banks can meet the requirements we have spelled out. We also look at it from a cost perspective. Ultimately, the decision is jointly made between the product group and the internal FI team. We also engage our in-country staff as well to ensure we have covered all areas before making the final decision.
Heuser: Sanjeev, you spend a lot of time managing relationships between J.P. Morgan and other FIs. What are your thoughts on the need to balance the relationship side with business requirements in a partnership discussion? Sharma: We have a large FI client base in Asia. Increasingly, we are seeing demand from these clients to help them expand, which stems from their own corporate clients' requirements. In supporting the requirements of these corporate clients in geographies where they are not present, they need a strong partner. We have traditionally been a correspondent bank of choice and have built a robust correspondent bank network in the region. We try to leverage off that and extend that network to our FI clients to help them service their corporate clients. When we talk about partnership, it can range from a full-scale outsourcing arrangement to risk participation, whereby we essentially leverage off our network and coverage of certain geographies where we are originating transactions where they are not present, and they can leverage off our expertise. It is important to also gauge what type of arrangement the client is looking for and what suits their requirements at that critical point.
Heuser: Lim, tell us something about how J.P. Morgan supports a global platform crossing multiple markets while still getting economies of scale, and how you balance the difficulty of providing a local touch while still gaining some kind of efficiency.
Lim: It is critical for us to understand the business we are supporting to determine where we should build our hubs and how our process should be set up. We have multiple considerations. One is managing concentration risk – we have built multiple hubs across J.P. Morgan in the US, Europe, India and Hong Kong. Core processing is done in these locations, which together with our strategic investment in technology and our processing platform have delivered many economies of scale. We balance that with our investment in having the right talent who can deliver the local client service and expertise on the ground in each market that is a key requirement for our clients today. Local expertise to effectively deal with enquiries in a timely manner is key to a positive customer experience.
Hogan: Our footprints are quite different. We are in the big centres around the group but are not entrenched in some of the markets. There's a difference between having a flag in a market versus having a proper capability on the ground. The two are different. The world has moved away from where it was 10 or 15 years ago, when there were banks with pretentions of being global. The global bank model is dead. There are a lot of regional or multi-regional providers, such as J.P. Morgan, so that tends towards a model where it is more collaboration between regional and domestic providers in a small group. We would not try to manufacture everywhere. There are places where we do have competitive strength. In areas where we do not, we could start to build or buy our own, which might be very expensive and the time to market would be very long, so we would have to look at alternative options. The question is, would you do that with another bank or with another provider who might not be a bank? If I want to get into trade systems, would I use another bank's trade system or use a completely different one?
Heuser: That is a good question. Each type of provider brings something different to the table. On one side, you have domain expertise and solidity. You can have confidence in dealing with an established player you know well; there is reciprocity. You can access a variable cost model. With a technology provider, there is typically a perception that it could be more nimble and flexible and a less costly option than building internally, but still requires a significant upfront investment. It is a constant question.
Lum: As DBS expands in all of its overseas markets, we have to ensure we have the product capabilities in all these locations. We want a standardised platform that will support all products across the network, and we have developed a detailed technology roadmap to complement the expansion of our transaction banking business. This will cover system/product requirements from the front-end (customer front end system to enable access to/from bank) and to the back-end operational processing systems. We try to standardise all these across the network so that, when products are rolled out, we can replicate all systems required to support these products. As a starting point, we develop business cases to justify the investments in each market. In some markets, we need to work with partners. The question is how we can leverage and integrate our partners' capabilities to deliver the required services. In addition to working with vendors to build required product capabilities that can be replicated to all countries we operate in, we also engage staff across the network in defining the functionalities and then compile required functionalities that meet the needs of our customers.
Latiff: We are very experienced in the region, and technology has allowed us to provide services from various locations across to others. Geographical boundaries no longer exist in many respects. If a bank needs to provide services to customers in a certain market, finding a provider with 60 branches will not necessarily deliver the capability needed. It is not always the biggest bank in that country that can provide the right kind of outsourcing arrangement or other value-add. What has also been important is the way we've managed our international agenda. We have created hubs to do things in a centralised way. That has given us scale, which is why we can still compete and provide value from where we operate to various locations where our customers are going. We also leverage our network with great success - which is not something that everyone can do. A network is something built over 30 or 40 years. We work with pretty much all the major banks in each country. By leveraging this, we partner with our clients globally and build a network that shares the advantage with our partners. We do not necessarily have a specific policy on outsourcing, but we do have best practices. Best practice is important because it shares knowledge about what someone can deliver, and accelerates the delivery of value. The more you share best practice, the more effectively the business objectives are driven for the two players, leading to a more successful partnership.
Sarup: The starting point is always: 'Can we do this ourselves or can we partner with an existing vendor that we have worked with for many years or do we need to explore other options?' Technology discussions tend to get fairly complex, because, as banking platforms and technologies have evolved from where they were in the past, it is unlikely you will build or expand a trade system on a standalone basis. It has to talk and connect to several other existing systems within the bank. Moreover, our trade business runs globally and therefore any new platform or an expansion of something we already have has to work consistently in every country. It has to be consistent with existing platforms and systems in that country.
Latiff: Price from a service-provider angle and cost from a buyer angle – how important is that element in terms of going into an outsourcing or partnership arrangement?
Sarup: It is one element of the decision. However, there are risks if you get into something not properly aligned with the strategy of the bank and the intended partner, where subsequent commercial considerations or changes in market conditions will affect the partnership. That sustainability and long-term alignment is probably a more important determining factor than what you are paying or are being paid for it.
Lum: Price is important but we also look at the ability to deliver to standards and service levels. We do not just choose the cheapest; it has to be a balance between price, service and functionality.
Sharma: Standardising offerings in different markets is also important. You would rather choose a vendor who is present in most of the geographies you are looking at, as opposed to going solo in each market, which may result in different standards of your offering to your ultimate client base. Standardisation of services is a key factor in determining your vendor.
Lum: It also makes time to market faster. If we have done an integration successfully in one country, it will be faster than repeating the exercise five times with different vendors.
Hogan: The interfacing is where costs come in, so if you have a different shape in each market, the interfacing costs get out of control. That cost then knocks onto the price that you can deliver. To the point on price, whatever that price may be it needs to be competitive. If it is not, you are out of the market, so you need something good, other than price, to offer. In most cases, it would be nice to be in that position, but we are probably a bit more balanced than that. We could load a price at the front, but if that then gets added onto, if it is not competitive, it is not going to be attractive.
Goda: We have varying strategic agreements with local banks in each country. We do not need such a strategic partnership in Singapore and Hong Kong, of course, but we have done something in India and China. There are limitations in building our own systems. We do business with FIs and corporates in India, for example, giving the financing for import settlement to Indian corporates – so-called buyer's credit. This is a kind of outsourcing, whereby local banks take the local corporate risk. It means we outsource the credit risk of local corporates. After the earthquake in Japan, the Asian supply chain network for Japanese corporates has changed slightly. Although Japanese corporates are more diversified in terms of vendors and supply chain, we have to expect Japanese corporates to diversify more in terms of manufacturing sites and vendor networks. Our challenge is how to support vendors to Japanese corporates located in India, Vietnam and China, and the rest of Asia.
Heuser: That is a good example of how your clients' requirements suddenly change, and you then need to find a way to support them quickly. In many cases, building your own platform and infrastructure is not going to be an option. When you think about the need to adapt to a sudden market shift and engaging a partner to support you, what are the major risks?
Goda: There are many. If we do things by ourselves, we can imagine how to support the supply chain, but if we outsource product delivery, the highest risk for us is how we monitor the product delivery by partnership banks to our clients or our clients' clients.
Heuser: What about control issues? Are there situations in which it would be important to maintain absolute control over certain areas of the business?
Hogan: I think so. You would have to set parameters. You need things to run smoothly. If they can run smoothly within certain guidelines on a day-to-day basis, then just let it flow. Credit decisions are very sensitive because there is a potential P&L impact on those, as there are on operational ones, but I am sure you have to take those into account. Anything which is a credit decision or front office, you need control over those, or at least a good set of rules which could say: 'within these parameters, do this type of business'. For example, in trade outsourcing, if a transaction goes over a certain value, it has three people looking at it as opposed to, say, a standard dual check.
Heuser: How about controlling the view of your client – the ultimate service that your client receives? Should the client be aware of what is happening behind the scenes?
Sarup: What clients require is a good solution with continuity, consistency and seamless service delivery. They might often be aware of a partnership that the bank has. For example, we are open with clients on our operational models. Not all transactions may be processed in the same country that the client is based in. Clients increasingly accept this. They understand the need for their banks to have centres of excellence and hubs that provide efficiency, which also benefits the clients.
Hogan: You have to differentiate between clients. If you have a small domestic client that knows and respects only you in that market, that is fine. If you have an offshore service they require, even though they are not offshore, they would often like you to front it. If you can get a white or private-label solution, that's great, and the client won't mind how this is done. If you have more sophisticated clients who are internationally active and they know when they go into a different market that you are not necessarily part of that banking infrastructure, it is more difficult to be able to front it yourself. They would expect and accept that you use other partners, as long as you can guide them and introduce them to somebody.
Sarup: Multinationals and large corporates know this. They use partnerships themselves and don't always have an office in every country they do business. The bottom line is continuity and quality of service in terms of the banking partner.
Latiff: The service element is certainly part of the evaluation but it often comes in later. It is, however, an ongoing aspect of a partnership that often decides how good you are. The reality is that out of 10,000 transactions that you may do a day, just one phone call on a single transaction that does not get the right response, could immediately create a service issue. That comes back to the earlier point about subject-matter expertise. Ultimately, the work has to be done, regardless of scale and size, by people who really know their business. And that is a differentiator.
Heuser: When looking for partner banks and considering partnership, how can potential partners be confident of the level of service they would get? What sort of factors would they tend to consider to really evaluate service?
Lim: They want a partner with the ability to provide professional advice. It has to be somebody they can trust and be able to regard as a subject matter expert. Additionally, they expect partner banks to share best practice on what is evolving in the market. It is also important to listen to their feedback on what they expect us to deliver. The dialogue is critical in ensuring the partnership works. From a J.P. Morgan perspective, we have professionals who have been in trade operations for 20 or 30 years. These are people with significant experience and expertise to share with clients and partners.
Hogan: You can centralise and outsource the operational side, but you need the local touch when it comes to service. The service then becomes not just a service but also an advisory role. It takes on front-office advisory rather than just back-office servicing and processing, so that changes slightly. On the positive side, there are good providers that provide very good services. You are trying to achieve different objectives, one of which is to reduce costs to make yourself more efficient. Trade is difficult and messy and it has not really reached a stage where you can get efficiencies you might get in payments. People do not like that cost aspect and when you're trying to scale up people who often do not have the ability to scale up without investing a lot of money, you have a lot of barriers to entry. Many banks have reached that stage and asked: 'Can I do it differently? If so, how?' Those models are now out there, they are well used by the market and they do a good job in reducing costs and improving efficiencies. If you are working with a good provider, do not use them just for that single service. You can open the door and get into aspects and offer your client different things that you would not normally be able to do in that market. My experiences have been positive. There have been some bad ones, but you learn. Once you have reached a certain point, you do not really go back. You just tweak the model going forward.
Lum: In trade, there are still a lot of shipping documents, so it's important to have a good system both at the hub and spokes to enable the hubbing of processing at remote locations and at the same time to enable the customer service wherever customers are located at the respective spokes. The hub needs to provide information to enable the spoke to provide required customer service levels. It is also important that images of documents can be scanned electronically to facilitate processing at the hub and at the same time have good electronic repository of those documents. In centralisation of trade processing at a hub, we have also to consider local language requirements as we are dealing with customers from around the network.
Goda: Today, the cargo-loading port is not necessarily the location of the beneficiary as an exporter; for example, the cargo may be going from Australia to China, but the customer is in Hong Kong. It means customer's trade flow sometimes does not fit to our traditional platform. For us, outsourcing is still a choice in terms of whether or not we have to expand our business in Asia. Outsourcing is not a simple thing but it remains a choice.
Lim: People are the constant factor and key to excellent service in the pan-regional business environment we are all describing. Keeping and developing good people is a key focus in J.P. Morgan. We are able to retain top operational talents within the firm because of it.