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Conference briefing
End of a
Banking Tradition?
By Nigel Robertson
Globa l Cash Management Ltd.
Banks may no longer be able to profitably continue their traditional role in
the transmission of money. This will
have a tremendous effect on the world's
banking systems.
Signs of signifi cant changes in the banking landscape are beginn ing to appea r,
few of which are in the banks' favor.
One of the more signifi ca nt c han ges
concern s the costs of a tradition al banking service where banks still have a virtu a l monopoly : cas h hand lin g and
money tran smi ss ion, includin g the execution of domesti c and internat io nal
payments and operatin g the check clearin g system. Declining profitabi li ty i n
eac h of these areas are digging hard into
shareholder valu e.
Cor-porate treasurers shou lei be awa re
of this issue, as it impacts the cos t/benefit of using banks ve rsu s non-b ank
ve ndors to tr ansn1it and process payments and co ll ections. More important,
however, are t he lon g-run effec ts that
w ill be chang in g the ve ry nat ure of
future bankin g systems.
A j anu ary 23 -25 bankin g co nference
in London d evo ted to " Dev e lopin g
Cost-Eiiecti ve Strategies for Lon g-Term
Profitab ility of Mon ey Transmission,"
indicated quite cl ea rJy how signifi ca nt
th is issue is and how urgent (and diffic ult) it w ill be to f i nd solutions.
A rr a nged by the In stitute fo r
Intern ational Resea rch, th e confere nce
prese ntecl expert contribution s from UJ<
"c lea rin g banks," and no n-b ank payment serv ice providers like Pay ment
Systems Europe Ltd., AT&T, Digital, and
Unysis .
Non-bank competition
H owever, as m o ney tran smis sion is
ident i fied as a loss- leade r for banks ,
non-banks see plenty of opportunity for
pro fit. Thi s is a rea l threat to w hi ch
banks have not come up with a clea r
response.
Meanwhi le, the pace of changes being
di ctated by both reta il and co rp orate
customers is qui cke ning. Customers are
rapidl y becom in g co mfo rt ab l e w ith
technol ogy and awa re of how much better servi ce and aclclecl va lue it ca n deliver. Thi s is also an indicati o n of banks'
fa ilure to deli ver va lue-add ing payments
services apace w ith customer demands.
The sa me tec hnology that ca n deli ver
hi gh- va lu e se rv i ces has red uced the
cos t-of-entry and created synergies with
other forms of (information) technology.
M any te lep hone compa nies, for exam ple, are effective ly positioned in thi s
market already. O ther providers also are
attracted by the high revenues avai lab le
from transacti on process in g, espec iall y
w hen ex ist in g se rv ice quality can be
improved at the sa me time.
The outsta ndin g question for bankers,
for which onl y time ca n give an answer,
is w hether this process of disintermediat ion ha s already go ne too far to be
stopped by reregu lation of th e banking
indu stry. Or are th ere now too m any
potentia l competito rs and too many
ways to enter the market for regul at ion
to have affect?
AWhy Guide
By Hal Dav is
" The JP Mor gan/ Arthur Andersen
Guid e to Corporate Ex posure
Man a ge m e nt," publi s h e d by Risk
Magazine (August 1994).
As an exa mpl e, th e authors ask readers to con sid er th e con sequ ences of
co mpetitors th at are exposed to floating
interest rates wh en they are fi xed-and
interest rates are falling. They should go
further to as k what the cost to competito rs w ould be to swap out of these positi o ns. Not o nl y should a co mpa ny identi fy w hat its competitors' exposures are,
but how th ey are manag ing th em.
Why do it?
Th e aut hors argue ex pli c itly fo r active
management of ri sk, som ething, as th ey
note, that is not uni versa ll y accepted by
no n-financ ial corporat ions. In Ch apter
2, th ey ri ghtl y po int out th at no n-f inanc i al co m pa ni es are al so ex po sed to
many financial risks in their und erlyin g
operations. Ch oosing to manage them
add s stab ility to cas h f lows and valu e
to th e firm .
Th o ug h , unl ess co mp a ni e s have
id entified th e nature of th eir ex pos ures,
they have no idea wh eth er (a nd by
how mu c h) th ey would benefit from
acti ve ly m anag in g th em o r not-a nd
w hi c h o nes . Chapter 3 p rese nts th e
se rv ice-m ark ed JP M o rga n " Expos ure
M a n age m ent Cub e" fra m ew ork. It
as ks co mp ani es to identify ex posures
b y m atc hin g " va lu e dri ve rs" -e .g .,
fac to rs affec tin g th e bottom line-with
t h e effec t s of " t ra d ed m a rk e t
fac tors"- ex posures (e .g., to FX rates)
th at have bee n stand ardi zed and th at