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

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Page 1: Report: Transaction Banking in Asia

Penrose Financial Limited

2nd Floor, 30/34 Moorgate, London EC2R 6DN

Telephone +44 (0)207 786 4888

Fax +44 (0)207 786 4889

Email [email protected]

www.penrose.co.ukThe Future of...

www.kapronasia.com

...Transaction Banking Kapronasia

172 Jinxian Lu, Shanghai, 200020

People’s Republic of China

Telephone +86 21 6171 1605

Email [email protected]

in Asia

Asian banking research:middle east brochure 08/09/2009 09:00 Page 1

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Penrose is an award-winning PR consultancy dedicated to financial services

about penrose

Our services > Broadcast> Communications audits> Copywriting> Creative campaigns> Crisis management

> e-PR strategy> Event management> International programme

implementation> Media and competitor intelligence

> Media relations> Media training> Monitoring industry issues> Speaker programmes> Strategic counsel

About us

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.

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.

Index

The Future of Transaction Banking in Asia

Introduction1

3

5

The future of transaction banking

The role of China

2

4

A resilient market with smarter customers

Evolving trends

Kapronasia is an Asian financial industry consultancy

About us

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.

about kapronasia

> Partnership Strategy/implementation > Lead Generation> Direct Sales

> Market Research > Business Strategy> Marketing implementation

Our services

6 Conclusion

Asian banking research:middle east brochure 08/09/2009 09:00 Page 3

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Asia’s leading banks have maintained strong balance sheets amidst the tempest of the financial crisis.

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

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?

Introduction

A rare commodity

1

1

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

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

holds and raises further questions on the role of Asia in the global economy.

September 2009

2

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Over the years, payments businesses globally have proved themselves to be reliable generators of revenue

for banks and never has this been truer than during the current financial crisis. According to Boston

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

and export-heavy region. Due to the crisis,

however, smaller Asian exporters have been

faced with lower global demand from a

revenue base that has already shrunk over the

past decade due to technology enhancements

and regulatory changes such as SEPA in the

Eurozone.

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

that transaction banking is becoming a more critical

part of their businesses. Indeed, most believe the

cream is starting to rise to the top and customers

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.

One of key points of differentiation for large and regional banks alike is a deeper understanding of their

customer’s needs. Many Asian banks have created specific industry teams which often consist of

2.2

4

"Do you take an external

solution or build it yourself?"

2Global demand

A resilient market with smarter customers

3

2.1

“Technology is more affordable so

anyone can have it. How can you

differentiate when everyone has

access to the same thing?”

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.

Asian banking research:middle east brochure 08/09/2009 09:00 Page 7

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3 Evolving trends

Cash builds the business

6

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.

Hand-in-hand with customer service is risk management. There is no pan-Asian regulator similar to that in

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

and promiscuous; there is no ”loyalty for loans", as customers search for the best rate each time they buy

a new product. Just as the retail market across Asia is awakening and changing the ways it interacts with

financial institutions, increased customer competition and transparency is driving change in the transaction

banking market.

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

happen if inflation returns, some institutions have shifted their attention to growing their deposit bases to

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.

5

3.1

Historically, transaction banking has never been viewed as a fashionable part of a bank’s business, but this

is changing. All the banks surveyed agree that cash management is virtually risk free, and growth so far in

2009 has been very strong. As transaction banking does not revolve around "big sexy deals" in the short

term, it is often regarded as an insurance style of business that generates annuities. These annuities create

recurring revenues which are very balance sheet-friendly and therefore especially attractive in a difficult

environment where banks are trying to lower risk profiles.

Cash management is also "one of the stickiest parts of the

business", meaning that despite a new-found promiscuity for the

best deals, overall bank relationships tend not to be switched on a

regular basis, which has been described by one bank as a "lock-in

with the customer". Relationships, therefore, are still important in

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.

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

"How are cash and

trade growing

together?"

Asian banking research:middle east brochure 08/09/2009 09:00 Page 9

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Fraud and fake documentation is also becoming a bigger issue in Asia, with banks reporting a significant

increase in fraudulent activity now versus 12 months ago. Many customers, who would normally be honest

and trustworthy, have found themselves in positions where there is little downside left and have resorted to

fraud. This is similar to experiences in the US and is a key focus for banks in Asia as they implement even

stricter compliance and risk management standards.

Quality and innovation

For customers, the current economic downturn has served as an opportune moment to rationalise their

banking relationships. Banks are witnessing a flight to quality and, as one interviewee said, "banks with

good names are doing well". These quality banks are typically considered to be those that either

completely avoided credit issues (as many Asian banks have done), or that have been supported by

government bailouts and have been deemed ‘too big to fail’.

New technology is also helping banks innovate.

Systems today have the ability to process a startlingly

large number of payments, and industry accepted

payment standards and formats mean that procedures

and system interfaces can be streamlined to enable

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.

this real-time financial information from a myriad of different internal systems. Further complicating matters

is the fact that most companies have relationships with several banks across multiple jurisdictions.

Although e-banking usually provides substantial information on a particular banking relationship, systems

also need to be able to provide a comprehensive view

across all the banking relationships to achieve a

consolidated, transparent, and up-to-date view of the

company’s financial situation.

In Asia, traditional lending and credit models previously

allowed for a risk adjusted return of around 15%.

Transactional models are now much more attractive from

a balance sheet perspective, as they generate high returns with little involvement of credit and risk. Some

banks believe risk adjusted returns will shift up to between 30-70%. More and more trade had been

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.

7

3.2

"Transaction banking is an

annuity business and

granular in nature"

"The downturn is a good

opportunity to rationalise

banking relationships"

8

Asian banking research:middle east brochure 08/09/2009 09:00 Page 11

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Better customer understanding

All banks surveyed agree that their businesses have suffered in the past by being very product driven.

Many are now attempting to correct this by taking a more customer-centric view through better

customer understanding. This runs hand-in-hand with a trend towards tailoring solutions for clients, and

banks are going even further by

incorporating their needs into future

product development.

One leading Asian bank has segmented its

customers into "knowledge banking

sectors" and has hired staff with direct

working experience in each of these

sectors. With this critical industry experience on board, they then move to identify specific working

capital requirements, critical components in the supply chain and MIS needs for each counterparty. This

enables the bank to increase turnover with improved payment lifecycles, and move beyond just simple

pricing discussions with clients.

10

4.2

A large percentage of the population in Asia does not have a bank account, and over a billion

customers are still considered ‘unbanked’. In many cases, it is just not economically viable for banks to

serve these customers through a traditional branch network. A large percentage live in rural areas and

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.

India is a technology leader in the region and banks are moving more and more customers away from

branches. One Indian interviewee mentioned that over 40% of their corporate customers are using

internet banking.

The technology is there, but unused

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

are very loosely tied together. Technology

‘advances’ are often addressed by adding

another layer of technology on top, but without

changing the core infrastructure. Smaller and

younger banks actually have a distinct

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

complexity as a significant inhibitor to transaction revenue growth.

More and more, banks are providing integrated solutions and connecting their banking systems directly

in to a corporation's Enterprise Resource Planning (ERP) system to more efficiently effect payments and

manage working capital. Standard interfaces for XML or ISO2022 are becoming widely accepted, but

still many companies have their own customised ERP. There are an astonishing number of different

4 The future of transaction banking

Technology matters

9

4.1

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)

infrastructure, whereas it was previously very dependent on

manual based settlements. Yet, constantly changing regulations,

including those governing Anti-Money Laundering (AML), are

making it difficult for banks to effectively leverage technology to

keep pace. The cost of entry for setting up the compliance systems required by today’s market is high,

and the danger is this will eventually lead to a thinning of the market where only the super-regionals and

large multinational corporations can compete.

Even though there is no pan-Asian banking regulator, it has also been mooted that a similar US ‘stress

test’ approach may eventually be required in Asia. Although it likely won’t happen in the short-term,

many banks are implementing global risk and reporting standards in Asia regardless to increase their

insight into the business and continue to build their ‘quality’ image.

"Technology is never

the problem"

"Because it's a volume game,

you need to have the technology

to make it as STP as possible""With volumes decreasing, now is a

good time to take a look at internal

products and processes to

streamline the value proposition"

Asian banking research:middle east brochure 08/09/2009 09:00 Page 13

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In addition to specific industry knowledge, banks are also looking at how they can differentiate

themselves through the actual servicing of clients. Typically a bank will have a relationship manager

within the bank that owns several customer relationships.

Yet, on a day to day basis, the client rarely speaks with the

relationship manager, rather with a service desk. One bank

polled was focused on getting the most out of this service

desk by enabling them to not only help the customer with

basic needs, but to address complex operational issues, and actively cross-sell to customers. The

relationship manager still owns a portfolio of accounts, but the service desk then becomes another

channel to increase customer satisfaction, retention and revenue.

A number of Asian banks are also differentiating via coverage, quality and cost. Cross-selling and

bundling of products (such as packaging with FX products) is also seen as a significant differentiator.

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.

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,

works well as it is based on an extremely efficient workflow.

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

4.3

"Nothing will be unified

within the next 10 years"

banks believe that this becomes difficult to handle with a centralised clearing platform, and their belief is

that customers receive an enhanced service from using the banks, who help them manage their cash flow

at the same time.

Those polled agree that a similar level of risk management to Europe and the US is unlikely to happen in

Asia for the foreseeable future, largely due to the huge variation in issues faced across many of the

countries. Some have more fundamental issues to address. A survey conducted by the State of Singapore

in July 2009 showed that trade finance was an area of concern for most Asia-Pacific Economic Co-

operation (APEC) economies, with 16 saying that they faced problems in trade financing. The most

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

wider economy. However, more than half APEC economies expect that the trade financing situation will

ease by the end of 2009.

"We're investing more in

providing better services"

11 12

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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

dollar will not lose its importance in Asia in the foreseeable future,

and the Chinese Yuan will grow in stature, but not achieve truly

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.

"China alone cannot

do everything"

13 14

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Should you wish to find out more about transaction banking in Asia please contact Andrew Nicolls, Senior

Partner at Penrose Financial, or Zennon Kapron, Managing Director at Kapronasia.

Andrew Nicolls

Penrose Financial

Senior Partner

Email: [email protected].

T +44 (0) 20 7786 4881

Zennon Kapron

Managing Director

Kapronasia

Email: [email protected]

T +86 21 617 1605

contact details

As a snapshot of the transaction banking landscape in Asia this research document serves to outline some

of the lasting themes that will shape the future of the market over the coming years. What is clear is that

those involved in the transaction banking and cash management market face a period of unprecedented

change – but change for the better.

The global economic downturn has undoubtedly had an effect on corporate clients in the region.

Transaction bankers have seen their stock rise, however, as investment banks take advantage of the

opportunities that building, growing and investing in their transaction banking services brings.

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

reacting nimbly to client needs. Those who succeed will undoubtedly be the ones to combine both

elements to bring the ultimate customer service and technologically enhanced model to their clients.

The challenges and opportunities in the Asian market remain diverse and varied. Internally, the perennial

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

they are operating in a brave new world where financing their business is a more complex process.

Although the regional challenges are very different from those of North America or Europe, the support and

guidance of transaction bankers in the region presents significant opportunities for those willing to adapt

and grow with this increasingly sophisticated client base.

6 Conclusion

Developments to watch

15

Penrose Financial Limited

2nd Floor, 30/34 Moorgate, London EC2R 6DN

Telephone +44 (0)207 786 4888

Fax +44 (0)207 786 4889

Email [email protected]

Kapronasia

172 Jinxian Lu, Shanghai, 200020

People’s Republic of China

Telephone +86 21 6171 1605

Email [email protected]

Contact

Asian banking research:middle east brochure 08/09/2009 09:00 Page 19