Banks: The scramble for niche markets

Change is in the air for Europe's banks. Will this be good for the sector in the long run? And if so, how can banks, companies and suppliers in the treasury space work together?

It's an unwritten rule in banking that financial cataclysms bring profound change within the industry. In the 1930s, for instance, politicians in the UK, Europe and the USA took the financial sector by the scruff of the neck following the Great Crash of 1929 and enforced an entirely new regulatory architecture.

Today, however, the industry is being influenced by factors other than the revenge of the regulators. They include increased competition from Asian banks moving into Europe as well as rising cross-border competition within Europe, a payments system that is in a state of flux, a trend for companies to bypass the banks and a marked swing towards sustainable banking that could end up in a virtual ban on the financing of projects deemed environmentally hostile.

Taken as a whole, the big picture is of a banking sector that is trying to find secure footing in a still unstable environment.

As David Miles, member of the Bank of England's monetary policy committee, has pointed out, tomorrow's financial landscape will look very different from the way it did before the Lehman collapse. Among other consequences, he predicts the banking sector will shrink in size; will become less imposing as a financial intermediary; will have to hold much higher levels of capital relative to assets, thus diminishing its influence in commerce in general; and will be forced to become much more liquid than it was in the run-up to the financial meltdown.

As he summarises: "The way in which banks operate will now be different – in the short term because of the damage done to their balance sheets and the continuing fragility of their funding, and in the longer term because of the need to ensure that the chances of another banking collapse like the one we have just seen are reduced."

IMF aiding stability

There are also questions being raised over the future of cross-border banking within the broader EU. Experts from the International Monetary Fund (IMF) candidly admitted recently that several subsidiary banks in central and eastern Europe nearly foundered and were ultimately saved by the "Vienna Initiative", which pumped IMF and EU money into their figurative vaults.

As Anne-Marie Gulde, senior advisor in the IMF's European department who helped coordinate the rescue, said in August: "Since the crisis started, the IMF has extended loans worth more than $160bn, most of them to [central and eastern European banks]." Without these loans, plus roll-overs and recapitalizations from often reluctant parent banks, "it would have been difficult to avert a systemic crisis."

Taken as a whole, the big picture is of a banking sector that is trying to find secure footing in a still unstable environment.

That's certainly how Véronique Moraguès, HSBC France's head of global banking sales for payments and cash management, sees it: "The new environment will intensify competition, with each bank trying to secure its position," she predicts. "The timeframe for this will be very short because at this point nobody really knows how long this fragile period of economic recovery will last.

"Banks will have to juggle between heavy regulation – only the most capitalised and liquid banks will survive in this new environment – and the investments needed to innovate and stay competitive," she adds. "Certain banks will have to review their business model, stop all noncore activities, optimise their cost structures and improve efficiency, all the while maintaining a high-quality level of service. In this, a process of specialisation is inevitable."

This will likely produce a marked split between universal banks with a broad footprint and a range of cross-border services, and low-cost banks that stake out and fiercely pursue a local market segment.

"You will have two banking choices – an international bank with a wide network and a niche bank," says Moraguès. We can expect an intense process of concentration.

Back to basics

In this challenging new world, it's likely service will be the key to survival rather than ever more financially-engineered products.

"The economic crisis highlighted the fact that many banks had been neglecting their main mission, which is to support their clients and actively participate in developing the economy," argues Moraguès.

In all this, the payments revolution will also have a profound influence. From the perspective of her specific expertise, Moraguès sees the SEPA initiative, which will harmonise payments across Europe, as yet another agent of competition.

"The banks offer relatively similar payments products, so cash management has become more of a commodity with common platforms and external service providers," she explains. "The new players in the payments market are coming from cash-handling fields such as cash flow and credit analysis."

As this trend deepens, she believes banks will work more with third-party platforms rather than trying to compete.

The overall outlook is that those banks that invest in advisory services, client support and delivery capacity will emerge as the winners in the long run because that's where the added value lies.

"The banker will soon return to his original role of an advisor, a person who accompanies their client," concludes Moraguès. Quoting Jean Monnet, one of the founders of the European Union, she says: "Mankind only accepts change through necessity and only sees that necessity in crisis."