Tue, 04/05/2004 - 07:49
Competition among banks for treasury management business is making credit more easily available, customer service more focused, and electronic services more efficient.
Greenwich Associates' research in global treasury management reveals several trends that appear to be working to the advantage of users of foreign exchange and interest-rate derivatives by driving down costs and improving the quality of service that institutions and corporations receive from their banks.
While treasury management customers stand to reap considerable gains from these developments, they must also be on guard against customer service downgrades on the part of banks that are increasingly segmenting their client lists on the basis of profitability.
"With new coverage systems, banks can monitor the relative profitability of their accounts more efficiently than ever," says Greenwich Associates consultant Robert Statius-Muller. "If a given company is producing too few profits in comparison with other corporations in its category, it is liable to get downgraded in terms of coverage, idea flow, and service generally."
Greenwich Associates' 2004 Global Treasury Management report examines both these customer-friendly trends and the potential consequences of increased market segmentation on the part of banks in foreign exchange and interest-rate derivatives. The report also analyzes other important market trends, including the continued growth in electronic foreign exchange trading and shifts in the compensation levels of treasury management professionals.
Forex growth and declines in derivatives
The foreign exchange volume of top-tier corporates and financial institutions around the world increased to nearly USD 40 trillion last year, with strong growth reported in every major region except non-Japan Asia and Latin America. Global interest-rate derivatives volume of top-tier corporates declined about 10%, but still finished the year at a robust USD 1.4 trillion.
European interest-rate derivatives volume, which accounts for 60% of the global total, was flat year-over-year, while U.S. corporate volume declined substantially and Asia Pacific volumes increased by 50%. Both forex and interest-rate derivatives business remains dominated by large players, both on the buy-side and the sell-side. In foreign exchange, the largest 10% of accounts trade some 75% of the total volume.
Similar patterns are evident in interest-rate derivatives, where 20% of users account for roughly 80% of global volume.
In their drive to increase efficiency, banks around the world are segmenting their treasury clients into niches based on clients' type of business and, in large part, on their value to the bank. While customer segmentation has the potential to deliver both positive and negative results to customers, Greenwich's consultants believe that the majority of clients will benefit from the trend. "If you are a corporate customer, you now get a banker who is experienced in corporate problems and solutions, whereas hedge funds get bankers familiar with their own unique needs and possibilities," says Greenwich Associates consultant Frank Feenstra.
While customers will benefit from such a shift in thinking, they should not forget that they are also being categorized in terms of their value. "Segmentation can make banks more efficient while also providing more value to their foreign exchange and derivatives customers," says Greenwich Associates consultant Woody Canaday. "But clients need to pay as much attention to these relationships and service levels as are the banks."
Competition and Credit
The potential for service downgrades is becoming an important concern for clients due to the increasing pressure on banks to provide credit in relation to their activities in foreign exchange and interest-rate derivatives. While most banks view the provision of credit as a loss leader, competition is forcing many of them to provide credit simply in order to be considered by customers for their forex and derivatives business. Less than 30% of global interest-rate derivatives users employ dealers other than their lending banks for their interest-rate derivatives business, and non-lenders receive only 14% of total volume. Globally, only 33% of forex customers use dealers other than their lending banks.
e-Trading and online research
Electronic foreign exchange trading volume doubled to more than $8 trillion in 2003, as the percentage of forex users trading electronically increased to 39% from 32% in 2002. Institutions that have made the leap to electronic systems traded 43% of their total FX volume online last year, from 32% the year before, and these traders plan to increase their eFX volumes even more next year.
While e-trading usage is increasing at an exponential rate, the growth in the number of users is slowing. Meanwhile, the percentage of institutions indicating that they had no intention of trading online was roughly flat last year.
These e-trading holdouts represent almost half of all foreign exchange users. "The dichotomy is striking," says Peter D'Amario. "Firms that have embraced electronic trading are now executing almost half of their volume online and they expect to top 50% next year. Right beside them you have half the market that is trading zero online."
Background Note: Greenwich Associates is a leading international research-based consulting firm in institutional financial services worldwide. Greenwich's studies aim to provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with additional offices in London, Toronto, and Tokyo, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies.
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