Report looking into trends and developments of transaction banking in Asia. 2009.

1. Asian banking research:middle east brochure 08/09/2009 09:00 Page 1
The Future of...
www.penrose.co.uk
www.kapronasia.com
Penrose Financial Limited Kapronasia
...Transaction Banking
in Asia
2nd Floor, 30/34 Moorgate, London EC2R 6DN 172 Jinxian Lu, Shanghai, 200020
Telephone +44 (0)207 786 4888 People’s Republic of China
Fax +44 (0)207 786 4889 Telephone +86 21 6171 1605
Email PR@penrose.co.uk Email info@kapronasia.com

2. Asian banking research:middle east brochure 08/09/2009 09:00 Page 3
about penrose
Our services > Broadcast > e-PR strategy > Media relations
> Communications audits > Event management > Media training
> Copywriting > International programme > Monitoring industry issues
> Creative campaigns implementation > Speaker programmes
> Crisis management > Media and competitor intelligence > Strategic counsel
Penrose is an award-winning PR consultancy dedicated to financial services
About us
The Future of Transaction Banking in Asia
We promise expertise, results and an exceptional level of service, making a measurable difference to your business.
We specialise in PR for financial services and are one of the UK's fastest growing financial consultancies. Founded in 1998,
our reputation has been built on the quality of our strategic advice and implementation for clients, combined
with the strength of our contacts and understanding of the media.
Index
We act as communications catalysts: raising a client's profile, managing the perception of its brand and helping to influence
the behaviour of its target audiences. We are a highly motivated team of financial PR experts working in a young, focused
and proactive environment.
1 Introduction
about kapronasia
Our services > Market Research > Partnership Strategy/implementation
2 A resilient market with smarter customers
> Business Strategy > Lead Generation
> Marketing implementation > Direct Sales
3 Evolving trends
4 The future of transaction banking
Kapronasia is an Asian financial industry consultancy 5 The role of China
About us
6 Conclusion
From our offices in Shanghai and Hong Kong, Kapronasia works with financial industry companies around the world to
help them understand and capitalize on opportunities in the Asian Financial Services Market.
> Through research, we help clients find hidden opportunities in the market
> Through consulting, we help clients define strategies to take advantage of those opportunities
> Through sales enablement, we help clients execute those strategies and get to sales
Our clients include large financial institutions, consultancies, and financial technology providers of all sizes.

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1 Introduction Penrose Financial and Kapronasia have spoken with the major players in the Asian transaction banking
landscape to analyse the challenges for banks and corporations in the region, as well as opportunities for
standing ground in a competitive market environment and challenging new world order.
The research identifies the increasing sophistication and promiscuity of the client base in the region, and
A rare commodity
how the key challenge for transaction bankers remains finding an effective linkage of the financial to the
physical supply chain. Whilst there has been a flight to quality, strong competition and commoditised
services within the region have also made it difficult for even Asia’s best banks to differentiate themselves
in order to attract and retain corporate customers.
The findings shed light on the industry's plans to diversify its business, provide insight into what the future
Asia’s leading banks have maintained strong balance sheets amidst the tempest of the financial crisis. holds and raises further questions on the role of Asia in the global economy.
Many have embraced transaction banking as a source of predictable and balance sheet-friendly revenue.
At the same time, many corporations are using the global slowdown as an opportunity to revaluate their September 2009
banking relationships.
As one of the few areas to have benefitted from the global credit crunch, transaction banking is a rare
breed in financial services. The value of managing working capital grew inordinately as markets ceased to
function last year, and even today, liquidity remains a scarce commodity.
Cash management has become a vital function for companies globally. Corporate treasurers are looking
for new ways to fund their businesses amidst a liquidity drought and CEOs recognise the need to generate
cash in a market where lines of credit have disappeared. Although the Asian region faces challenges that
are very different to those in North America or Europe, using lessons learnt from the West, Asian banks will
continue to develop their transaction banking businesses even as credit loosens and the global economy
looks towards recovery.
Risk management is key for corporations as they look to hedge exposures. In Europe, increased
regulation brings with it an added burden in the form of SEPA, Faster Payments and the Payments
Services Directive. As a growing band of global corporations emerge in Asia, the region is still grappling
with an export slump exacerbated by the lending difficulties of commercial banks. The Asian Development
Bank is actively rolling out financing agreements under its trade finance programme, which is committed to
generate up to $15bn in support through until 2013, and funds have now been committed under the World
Bank's $50bn trade liquidity rescue programme to help things along in the face of export difficulties.
Asia faces significant challenges. Should disappearing finance for large corporations in the region be of
greatest concern, or will the lack of finance for small producers to buy seed, pesticides and fertiliser cause
another food crisis by year-end?
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2 A resilient market with smarter customers 2.2 Opportunities in a crisis
The rise of transaction banking in the US is acknowledged by market participants who are seeing
increased investment across the board, and notably in technology. There is a similar trend in the Asian
market where most institutions interviewed agree
Global demand that transaction banking is becoming a more critical
part of their businesses. Indeed, most believe the
"Do you take an external
cream is starting to rise to the top and customers solution or build it yourself?"
are following with a clear flight to quality. Key for
Asian banks, amidst strong competition, affordable technology and commoditised services within the
region, is to differentiate themselves in unique ways in order to attract and retain corporate customers.
Over the years, payments businesses globally have proved themselves to be reliable generators of revenue
One of key points of differentiation for large and regional banks alike is a deeper understanding of their
for banks and never has this been truer than during the current financial crisis. According to Boston
customer’s needs. Many Asian banks have created specific industry teams which often consist of
Consulting Group (March 2009), global payments revenues surpassed $805billion in 2008, up from $654
billion in 2006. Forecasts are that they will reach $1.4 trillion by 2016.
One of the key sources of growth in payment
revenue is Asia, a fragmented, multi-currency “Technology is more affordable so
and export-heavy region. Due to the crisis,
however, smaller Asian exporters have been anyone can have it. How can you
faced with lower global demand from a differentiate when everyone has
revenue base that has already shrunk over the
past decade due to technology enhancements access to the same thing?”
and regulatory changes such as SEPA in the
Eurozone.
2.1 Volumes
A natural outcome of the global crisis was a sudden decrease in trade volume as credit dried up and
consumers around the world put their wallets away. Yet, even in the face of declining volume, trade finance
revenue actually grew as risk aversion and scare liquidity drove pricing up. As credit has loosened, pricing
has started to come down and trade volumes increased across Asia, but the biggest spender of all, the US
consumer, has yet to rebound and trade volumes in Asia are still down from their peaks.
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participants from the industry itself, to get a clearer insight into typical challenges. Other banks use their
previous experience with other similarly sized or regionally focused clients to help their clients navigate the
challenges of developing a similar business. 3 Evolving trends
Hand-in-hand with customer service is risk management. There is no pan-Asian regulator similar to that in
Cash builds the business
the EU, so many risk requirements are set on a country-by-country basis and tend not to be as
comprehensive as those in the West. Despite this, banks are proactively implementing solutions to better
understand their real-time risk profile to be in a position to offer better products to their top clients.
Overall, Asian banks have become increasingly aware that their customers have become much smarter
Historically, transaction banking has never been viewed as a fashionable part of a bank’s business, but this
and promiscuous; there is no ”loyalty for loans", as customers search for the best rate each time they buy
is changing. All the banks surveyed agree that cash management is virtually risk free, and growth so far in
a new product. Just as the retail market across Asia is awakening and changing the ways it interacts with
2009 has been very strong. As transaction banking does not revolve around "big sexy deals" in the short
financial institutions, increased customer competition and transparency is driving change in the transaction
term, it is often regarded as an insurance style of business that generates annuities. These annuities create
banking market.
recurring revenues which are very balance sheet-friendly and therefore especially attractive in a difficult
environment where banks are trying to lower risk profiles.
In the long-term, cash management in the region will be key, however, low interest rates and compressed
spreads are a challenge for banks and economies alike. Not only are banks focusing on what would
Cash management is also "one of the stickiest parts of the
happen if inflation returns, some institutions have shifted their attention to growing their deposit bases to
business", meaning that despite a new-found promiscuity for the
"How are cash and
insulate themselves should we face another downturn; the hope being that a strong deposit base plus
steady revenue from low-risk fee based products will see them through.
best deals, overall bank relationships tend not to be switched on a trade growing
regular basis, which has been described by one bank as a "lock-in
with the customer". Relationships, therefore, are still important in together?"
building on this core revenue stream.
With working capital a scarce commodity, cash management is especially crucial for larger businesses with
greater liquidity requirements. According to one bank, the basic techniques of liquidity management have
not changed, with processes such as sweeping and pooling still common practice and almost considered
‘must haves’. What has evolved, however, is the implementation of these processes in a more
sophisticated and global manner. For example, many large multinationals are using daily cross-border cash
pooling for locations where this is legally possible to better manage their capital. It is not just the large
multinationals either, smaller companies with multinational businesses are realising greater efficiencies and
the benefits of implementing increasingly sophisticated liquidity management processes.
3.1 Transparency and compliance
Equally important for corporations, and notably so in the post-credit crunch world order, is having
complete cash transparency. A CFO needs to be able to know where their money is and what it is doing at
any time to be able to make better informed decisions. Companies need to have systems that can gather
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this real-time financial information from a myriad of different internal systems. Further complicating matters Fraud and fake documentation is also becoming a bigger issue in Asia, with banks reporting a significant
is the fact that most companies have relationships with several banks across multiple jurisdictions. increase in fraudulent activity now versus 12 months ago. Many customers, who would normally be honest
Although e-banking usually provides substantial information on a particular banking relationship, systems and trustworthy, have found themselves in positions where there is little downside left and have resorted to
also need to be able to provide a comprehensive view fraud. This is similar to experiences in the US and is a key focus for banks in Asia as they implement even
across all the banking relationships to achieve a stricter compliance and risk management standards.
consolidated, transparent, and up-to-date view of the "The downturn is a good
company’s financial situation.
opportunity to rationalise 3.2 Quality and innovation
In Asia, traditional lending and credit models previously banking relationships" For customers, the current economic downturn has served as an opportune moment to rationalise their
allowed for a risk adjusted return of around 15%.
banking relationships. Banks are witnessing a flight to quality and, as one interviewee said, "banks with
Transactional models are now much more attractive from
good names are doing well". These quality banks are typically considered to be those that either
a balance sheet perspective, as they generate high returns with little involvement of credit and risk. Some
completely avoided credit issues (as many Asian banks have done), or that have been supported by
banks believe risk adjusted returns will shift up to between 30-70%. More and more trade had been
government bailouts and have been deemed ‘too big to fail’.
moving into open accounts, but the trend since the beginning of the economic crisis is that trade is now
moving back to letters of credit.
New technology is also helping banks innovate.
Systems today have the ability to process a startlingly "Transaction banking is an
large number of payments, and industry accepted
payment standards and formats mean that procedures
annuity business and
and system interfaces can be streamlined to enable granular in nature"
further innovation. However, as one bank pointed out,
innovation is likely to be around ‘bread and butter’
product and service or operational process adoption, and not individual technologies, with some banks
concentrating on providing better customer-centric services rather than trying to develop new product
technologies.
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4 The future of transaction banking ERP providers and consultants, which creates a myriad of connectivity issues and a time-consuming
integration headache for the bank.
Settlement processes are increasingly being connected into part of the ERP system, and in many cases
the whole trade finance supply chain is embedded in a Straight Through Processing (STP)
Technology matters infrastructure, whereas it was previously very dependent on
manual based settlements. Yet, constantly changing regulations, "Technology is never
including those governing Anti-Money Laundering (AML), are
making it difficult for banks to effectively leverage technology to
the problem"
A large percentage of the population in Asia does not have a bank account, and over a billion keep pace. The cost of entry for setting up the compliance systems required by today’s market is high,
customers are still considered ‘unbanked’. In many cases, it is just not economically viable for banks to and the danger is this will eventually lead to a thinning of the market where only the super-regionals and
serve these customers through a traditional branch network. A large percentage live in rural areas and large multinational corporations can compete.
the cost to maintain these networks is simply too high in relation to the revenue potentials. This is why
mobile and online banking plays a much more important role in Asia than in other parts of the world. Even though there is no pan-Asian banking regulator, it has also been mooted that a similar US ‘stress
India is a technology leader in the region and banks are moving more and more customers away from test’ approach may eventually be required in Asia. Although it likely won’t happen in the short-term,
branches. One Indian interviewee mentioned that over 40% of their corporate customers are using many banks are implementing global risk and reporting standards in Asia regardless to increase their
internet banking. insight into the business and continue to build their ‘quality’ image.
4.1 The technology is there, but unused
4.2 Better customer understanding
The actual technology available in the market tends to be way ahead of what is actually possible in a
bank due to legacy systems and standards. Typically banks have very fragmented legacy systems that All banks surveyed agree that their businesses have suffered in the past by being very product driven.
are very loosely tied together. Technology Many are now attempting to correct this by taking a more customer-centric view through better
‘advances’ are often addressed by adding "Because it's a volume game, customer understanding. This runs hand-in-hand with a trend towards tailoring solutions for clients, and
banks are going even further by
another layer of technology on top, but without
you need to have the technology incorporating their needs into future "With volumes decreasing, now is a
changing the core infrastructure. Smaller and
to make it as STP as possible" product development.
younger banks actually have a distinct
good time to take a look at internal
advantage as they often aren’t tied to legacy
systems and are more agile in a constantly changing market. Indeed, many of the larger banks cite IT
One leading Asian bank has segmented its
products and processes to
customers into "knowledge banking
complexity as a significant inhibitor to transaction revenue growth.
sectors" and has hired staff with direct streamline the value proposition"
working experience in each of these
More and more, banks are providing integrated solutions and connecting their banking systems directly sectors. With this critical industry experience on board, they then move to identify specific working
in to a corporation's Enterprise Resource Planning (ERP) system to more efficiently effect payments and capital requirements, critical components in the supply chain and MIS needs for each counterparty. This
manage working capital. Standard interfaces for XML or ISO2022 are becoming widely accepted, but enables the bank to increase turnover with improved payment lifecycles, and move beyond just simple
still many companies have their own customised ERP. There are an astonishing number of different pricing discussions with clients.
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In addition to specific industry knowledge, banks are also looking at how they can differentiate banks believe that this becomes difficult to handle with a centralised clearing platform, and their belief is
themselves through the actual servicing of clients. Typically a bank will have a relationship manager that customers receive an enhanced service from using the banks, who help them manage their cash flow
within the bank that owns several customer relationships. at the same time.
Yet, on a day to day basis, the client rarely speaks with the "We're investing more in
relationship manager, rather with a service desk. One bank Those polled agree that a similar level of risk management to Europe and the US is unlikely to happen in
polled was focused on getting the most out of this service providing better services" Asia for the foreseeable future, largely due to the huge variation in issues faced across many of the
desk by enabling them to not only help the customer with countries. Some have more fundamental issues to address. A survey conducted by the State of Singapore
basic needs, but to address complex operational issues, and actively cross-sell to customers. The in July 2009 showed that trade finance was an area of concern for most Asia-Pacific Economic Co-
relationship manager still owns a portfolio of accounts, but the service desk then becomes another operation (APEC) economies, with 16 saying that they faced problems in trade financing. The most
channel to increase customer satisfaction, retention and revenue.
commonly cited reasons for tightness in trade financing were the increased risk aversion of financial
institutions towards companies, higher perceived counterparty risks, and general liquidity shortage in the
A number of Asian banks are also differentiating via coverage, quality and cost. Cross-selling and
wider economy. However, more than half APEC economies expect that the trade financing situation will
bundling of products (such as packaging with FX products) is also seen as a significant differentiator.
ease by the end of 2009.
However, to provide value it must be supported by having the appropriate technology in place. One
bank noted that there is a need for the "consultative seller" who sells solutions, not products. The aim
here is to partner with customers and to help them structure their businesses in Asia.
4.3 Centralisation in Asia
Corporations and banks have expressed the need for greater intra-region efficiency across Asia.
However, political decisions combined with a fragmented and culturally diverse market have, to-date,
hindered any attempts at centralisation. Likewise, most banks in the region agree that a regional
currency will not emerge in the next 10 years. This is not only due to cultural differences in each
market, but also due to diverse technology infrastructures and lack of homogeneous technology
standards and infrastructure.
In Asia, the arguments against shifting to a central clearing platform are similar to the arguments
brought forward against SWIFT. It was noted that a clearing house is only as good as the efficiency of
its members. Examples in other markets such as CLS, the
global settlement system in the foreign exchange market, "Nothing will be unified
works well as it is based on an extremely efficient workflow.
within the next 10 years"
Even if transaction costs in Europe are much lower through
SWIFT, banks doubt this will convince Asian economies to
make the switch. Their priorities lie with customer service and managing cash flow, and being able to
predict and influence payment flows (via prioritisation for example) is essential. A large proportion of
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5 The role of China
Riding the dragon
Banks across Asia broadly agree that China is doing all the right things, and doing them in a controlled
manner. In addition to domestic growth, other countries within the Asia Pacific region also feel the positive
effects associated with riding on the coat-tails of China's successes.
However, most banks participating in the study believed that the "China alone cannot
dollar will not lose its importance in Asia in the foreseeable future,
and the Chinese Yuan will grow in stature, but not achieve truly do everything"
global currency status in the next five years. The idea is that China is
not trying to break away from the US Dollar, but rather looking to internationalise the Yuan.
One of the criticisms of the Yuan is that it is not a fully convertible currency like the USD or Euro. One
respondent actually pointed out that that didn’t really matter as long as currency swap agreements were in
place to allow central banks to hold Yuan reserves and the clearing systems were in place on the back-
end to facilitate the transaction. China recognises this and Malaysia, for example, now has Yuan reserves
as well as a system allowing for Yuan settlement. China already has similar relationships with other
countries and has been pursuing this strategy for years. In fact, unlike European or Japanese banks who
entered the US to get access to deals, Chinese banks entered the US market to access settlement fund
transfer systems.
Respondents saw competition in China itself to be a very difficult challenge. Domestic Chinese banks still
have access to a larger portfolio of potential products than their foreign counterparts and often domestic
banks are favoured for deals and capital allocations. Yet things are changing and most banks were very
positive in their outlook for the future on the mainland.
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contact details
6 Conclusion
Developments to watch Contact
As a snapshot of the transaction banking landscape in Asia this research document serves to outline some Should you wish to find out more about transaction banking in Asia please contact Andrew Nicolls, Senior
of the lasting themes that will shape the future of the market over the coming years. What is clear is that Partner at Penrose Financial, or Zennon Kapron, Managing Director at Kapronasia.
those involved in the transaction banking and cash management market face a period of unprecedented
change – but change for the better.
Andrew Nicolls
The global economic downturn has undoubtedly had an effect on corporate clients in the region. Penrose Financial
Transaction bankers have seen their stock rise, however, as investment banks take advantage of the Senior Partner
opportunities that building, growing and investing in their transaction banking services brings. Email: andrewn@penrose.co.uk.
T +44 (0) 20 7786 4881
Players in the market have a huge opportunity to take advantage of either the scale of their offerings in a
geographically and culturally diverse market, or their skill in developing and managing relationships and Zennon Kapron
reacting nimbly to client needs. Those who succeed will undoubtedly be the ones to combine both Managing Director
elements to bring the ultimate customer service and technologically enhanced model to their clients. Kapronasia
Email: zennon.kapron@kapronasia.com
The challenges and opportunities in the Asian market remain diverse and varied. Internally, the perennial T +86 21 617 1605
issues of long-term technology planning and technology development continue to hinder development.
Whilst externally, the challenge of linking banking systems to a myriad of client systems and standards is
made even more difficult given the extreme differences in maturity of technology across the Asia Pacific
region.
Corporate clients and their CFO controllers are increasingly savvy regarding their bank relationships, and
are undoubtedly more promiscuous in their outlook as they seek to achieve efficiencies. At the same time Penrose Financial Limited Kapronasia
they are operating in a brave new world where financing their business is a more complex process. 2nd Floor, 30/34 Moorgate, London EC2R 6DN 172 Jinxian Lu, Shanghai, 200020
Although the regional challenges are very different from those of North America or Europe, the support and Telephone +44 (0)207 786 4888 People’s Republic of China
Fax +44 (0)207 786 4889 Telephone +86 21 6171 1605
guidance of transaction bankers in the region presents significant opportunities for those willing to adapt
Email PR@penrose.co.uk Email info@kapronasia.com
and grow with this increasingly sophisticated client base.
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