The standard operating model for transaction banking is in trouble. It reminds me of my own industry, media.
In 1984, the American counterculture icon Stewart Brand, at a hacker’s conference, said this to Apple’s Steve Wozniak:
“On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time.”
Now, that statement can be interpreted in many ways, but it sparked a revolution in media. The idea that “information wants to be free” to be copied and shared – combined with the advent of mobile phones and social media – have transformed the way people consume content.
And not just consume it. They create it, too, whether it’s photos of the family vacation, or an A.I. expert explaining neural networks on Medium, or Henri Arslanian shooting videos about fintech for his LinkedIn feed. The value of media brands has declined because journalists are no longer the major gatekeepers of information, and because habits have shifted from buying trusted news sites to searching for specific information.
That’s internet 1.0, the internet of information. It blew up the world of companies with a claim on information. Today most news sites depend on advertizing, which has led those without strong governance into the sewer of clickbait.
What’s the most important media site now? Where do those Google searches take you? Wikipedia.
Wikipedia is global, freely licensed and crowd-sourced information. It gets better and better. It now hosts about 50 million articles in nearly 300 languages. Every month, it is visited by 400 million unique visitors using 1.5 billion devices. Its expansion was fuelled not by amazing content but by getting users to copy or share its articles and link back to it. (I learned this thanks to a presentation by Wales at a recent event organized by The Asian Banker.)
How is this behemoth financed? By donations. It’s a non-profit. Its founder, Jimmy Wales, leads a comfortable life, but he’s not rich. Wikipedia is a utility.
The internet of value
We’re now shifting into internet 2.0, the internet of value. Now, a lot of people are skeptical about this. They hear this phrase and think “bitcoin”, drug dealers on the dark web. But the internet of value is already here, and I believe it will become ubiquitous. Sending money will become as easy and effortless as sending an email.
That’s the vision behind Facebook’s Libra, which is just part of a landgrab by all sorts of players for the new world of payments, trade finance, forex and all the other bits of transaction banking.
Transaction bankers are the daily-working-grind part of corporate banking. They help companies manage cash, make payments, transact in foreign currencies, handle documentation (for trade or supply chain finance), and access trust and custody services. This day-to-day work is critical to maintaining relationships for bigger types of business, like lending, underwriting securities, and strategic advice. It’s also necessary to trade and commerce.
But what happens if we update Brand’s famous quote?
What if we invited Brand to a fintech conference and he said this:
“On the one hand banking wants to be expensive, because it’s so valuable. The right cash-management solution at the right time just changes your life. On the other hand, banking wants to be free, because the cost of connecting commercial counterparties is getting lower and lower all the time.”
For transaction bankers the two biggest areas undergoing tech-driven change are payments and financing trade and supply chains.
Crossborder payments is traditionally built around correspondent banking: two or more banks in different countries helping their respective clients send and receive money. SWIFT, a utility owned by over 200 banks, has been at the heart of large correspondent transactions, as the provider of standardized messages.
For a long time SWIFT has been regarded as a sleepy operation but pressures by new competitors have jolted it into action. It has introduced a program called SWIFT gpi to provide more automation, transparency, speed and reliability. Many global banks like Citi are keen on supporting this, so they don’t have to completely revamp their own operating systems, risk controls, and I.T.
SWIFT gpi solves a lot of the problems in payments, but it’s nonetheless a bet on the status quo. There is now a growing number of serious rivals using blockchain and crypto-currencies to facilitate payment.
- Ripple was the first to do token-based crossborder payments. It relies on local payment rails for final settlement, and its XRP crypto-currency confuses people, but it is attracting banks looking to forge new lines of business, like Thailand’s SCB or Spain’s Santander.
- IBM introduced WorldWire for remittances and crossborder payments in ecommerce, in another bid to cut out SWIFT and correspondent banking. It also relies on a crypto-currency for facilitating those payments.
- Visa launched its VisaB2B program in another assault against SWIFT and correspondent banking. Visa’s bank network has far more members than SWIFT’s (because so many banks issue Visa credit cards).
- The central banks and payment authorities of Singapore and Canada are working on crossborder blockchain-based payment and settlement systems.
- Maersk, the shipping company, has persuaded most of its major competitors to join its blockchain project for taking paperwork out of shipping, including documents related to financing.
And then of course there’s Libra.
Volumes versus margins
These projects threaten banks in different ways. In some cases, banks are launching their own tokens to support trade, such as J.P. Morgan’s JPM Coin. These projects often have barriers that have yet to be overcome, such as foreign exchange. Corporate clients are testing them as backups to SWIFT rather than direct replacements. Plenty of questions remain around regulation, particularly when it comes to data protection, data privacy, and data storage.
But the direction is clear. The fees that banks make in sorting out paperwork for crossborder payments are going away. Banking wants to be free!
This might not be all bad for status-quo players. Ecommerce is a great example of a market that will expand as crossborder payments become easier. Ditto for trading volumes. Today ecommerce is only about 15% of all retail business worldwide; higher in the U.S., still quite low in cash-dependent countries like India and most of Southeast Asia. But it’s growing fast, faster than what today’s financial infrastructure can handle. Margins will fall but banks should be able to benefit if volumes balloon.
There’s other kinds of bargains in the works.
These same technologies and trends are bringing transparency and efficiency to how corporations manage their cash. Today there’s some $10 trillion of corporate capital sitting idly in bank accounts, because companies need to tap liquidity to pre-fund all sorts of commercial activities. That will decline, which means banks will lose a source of their own funding.
But the promise of a huge, tech-supported expansion of trade and ecommerce – and especially the creation of tokenized assets and the crypto-economy – will mean there are far more assets to bank. And the more assets that get banked, the more credit that private banks can create.
So from the payments side of things, the immediate outlook for traditional banking revenues is bleak but banks that are creative, nimble and open to fintech partnerships have a future. At the end of the day, corporate banks thrive because industries require very specialized knowledge and services, and banks will still retain that intelligence.
Trade: searching for wins
On the trade side, there’s also a lot of activity. This is where the banks themselves are active, trying to develop trade-finance blockchain consortiums, for example.
None of these solutions have really taken off. Distributed-ledger technology is about networks – about getting all the players to sit at the same table. The amount of paperwork that can be reduced is massive, but the complexity and diversity of players (custom tax officials, insurers, freight forwarders, etc) makes real progress difficult. These solutions can save companies a lot of time but they haven’t provided radically cheaper access to funding.
This could change. There are many fintechs working on invoice financing marketplaces. These are going to expand. DigFin is aware of at least one fintech creating a platform using smart contracts to create a digital exchange for letters of credit.
In such a world, banks are still necessary as credit guarantors, but not as document processors or to facilitate payments. Whether such initiatives really do lead to much cheaper financing has yet to be seen, but they will certainly improve speed and transparency.
Banks in the meantime are turning their attention away from these front-office initiatives, and trying to use artificial intelligence tools (such as natural-language processing and optical character recognition) to digitize their own documentation.
They are basically in a race against time to eliminate paperwork internally, but they expect paper and manual checking to continue when dealing with, say, letters of credit.
Does banking want to be free?
Where does this ultimately leave transaction banks? If banking services “want to be free”, does the increase in volumes and creation of new bankable assets compensate for the loss of fees from administration, correspondent banking and payments?
Today, media companies still exist. A very few, such as the New York Times and the Financial Times, have become successful at selling subscriptions. But there’s only room for a few such players.
Meanwhile the vast majority of media revenues have been gobbled up by Facebook and Google, and the majority of searches go to the utility Wikipedia. There are lots of boutique media bubbling up, such as DigFin, although most of our business models are, ahem, works in progress.
HSBC’s bid for creating communities among buyers and sellers is one creative response. It’s unclear whether a bank can create and monetize a social-media platform for corporations, but it’s certainly a move in keeping with the spirit of the times.
But if media companies like mine succeed it will because we are not trying to replicate models of old – we are not gatekeepers but facilitators, akin to a credit union rather than a classic commercial lender. In some ways it’s great, but the margins in facilitation can’t match those of a gatekeeper. Banks are going to face the same reality.