As risk-averse big banks de-risk from certain markets and geographies, their strategies are causing a ripple effect in the industry. For them, it is often quicker and simpler to distance themselves from an entire group, sector or region than to assess each one individually, or assume the risk of fines and negative media. Smaller banks face significant challenges as a result which could have wider societal and economic implications across the globe – including the loss of corporate and retail customers, lower remittance volumes and falling profits.
In a recent Banking Circle webinar, Jon Levine, Co-Head of Institutional Banking at Banking Circle, was joined by Colin Digby, Head of Strategic Client Coverage Group at Crown Agents Bank, and Martin Fiddaman, Founder and Managing Director at Martin Fiddaman Associates Ltd, to discuss the current landscape for smaller banks. The session was moderated by David Birch, Author, Advisor, and Commentator at 15Mb Ltd and Consult Hyperion.
You can watch the full SIBOS special episode on demand here, or read on for a wrap-up of the key takeaways from the session.
How are providers servicing smaller banks?
In the aftermath of the 2008 financial crisis, a major shift in risk appetite within the banking sector led to widespread de-risking from the big banks – leaving some struggling to access the financial services they needed. More than a decade on, there have been some significant improvements in how risk is managed in the sector – with technology playing a key role, says Jon Levine, Co-Head of Institutional Banking at Banking Circle.
“The good news is that banks, even mid-size banks, have spent a lot of money on compliance over the years – particularly in the last several years – and I think the financial system is much more protected from some of the risks than it might have been a decade ago,” Jon explained.
For mid-size banks today, the key to gaining the right access to the services they need is to “find a home” in the correspondent banking world where mid-size banks are seen as attractive, Jon said.
“At Banking Circle, our view is that you can serve the mid-size or even the small bank market appropriately. It’s about process engineering, and the use of technology selectively to be more efficient and to get the cost structure down… without giving ground on compliance standards.”
But for some of the older providers in the market, harnessing technology to improve their clients’ access to services has been a much slower process.
“The traditional bank providers are hamstrung by legacy people, systems and processes,” Martin Fiddaman, Founder and Managing Director at Martin Fiddaman Associates Ltd, said. While many incumbent banks are looking to reduce their cost-to-serve through technology, they are often struggling to get up to date and to balance new technologies with their compliance requirements, he explained.
Jon echoed this point, adding that large Tier 1 banks need to improve their processes. “You can’t blindly rely on technology either, there has to be oversight,” he said. “But with proper oversight and proper review, can you use technology to drive down the cost of providing banking rails? Absolutely.”
Small banks’ big challenge & the future outlook
One unique challenge for smaller banks is their lower volume of flow, which can put them at a disadvantage to providers who must weigh up risk versus reward, the panel agreed.
“For smaller players, you need to think about how you can smartly leverage the flows that you have to keep your providers happy,” said Martin Fiddaman. That will inevitably mean using fewer providers, he went on to say, adding that smaller banks should look to multi-currency, multi-service providers for their needs.
Jon Levine agreed: “I think most bankers across the industry, and within our bank too, would say that they would rather see a good percentage of a client’s flows than be their tenth banking provider. Because if you are banking provider number 10 and you only see 1% of the flow, you still have the full KYC spectrum to cover.”
In the future, regulators have a key role to play in encouraging big banks to improve their approach to risk and ensure fairer access to services, says Colin Digby, Head of Strategic Client Coverage Group at Crown Agents Bank.
“There is a need for a multi-layered approach stemming from both Tier 1 banks and regulators,” Colin said, adding that there is a need for them to embrace the broader community and work together.
While de-risking has largely been achieved with a broad brush so far, in the future the big players should take a more considered approach, he urged.
“It’s very easy just to cut a whole branch off of a tree,” Colin said. “But they’re going to have to step up a little bit more, and I think the regulator needs to push that agenda forward.”