Internet FX Corporate Banking Platforms in PolandGrzegorz Hansen, BRE Bank - 8 Dec 2010

The last years of the previous decade in Poland were marked by the launch of several web-based foreign exchange (FX) corporate banking platforms. Now it is time for them to mature and flourish before Poland joins the eurozone (most likely after 2015) whereupon a major part of foreign exchange (FX) business will disappear.

Although first web-based FX trading platforms had already been implemented in several banks around 2006, the majority were not offered to customers directly. The web applications were used internally by corporate dealers in branches, whereby they could react dynamically to market changes without the need to consult the central dealing via phone. However, deals with customers were still made by the branch dealer in person or over the telephone.

The real change took place in 2008 and 2009 when several banks introduced their FX trading platforms directly to corporate customers. As a result, at the beginning of 2010, six of Poland’s 20 largest banks were offering their FX dealing via the internet to Polish corporate customers: BPH (GE Group) - DealingNet, BRE (Commerzbank Group) - iBRE FX, Citibank - Online Trading, Millennium - Millennium Forex Trader, Pekao (Unicredit Group) - Autodealing, Raiffeisen - R-Dealer.

All of the platforms are accessible via each of the banks corporate banking internet portals. Although the same technical tools (codes, passwords, tokens, signatures etc) are usually used to access the portal and to authorise transactions in any of the bank’s applications, FX trading applications are separate from other internet modules or applications provided by the bank.

These FX dealing services are usually thoroughly customised: Different margins are applied dependent on currency. Bid and ask margins can be different dependent on bank’s overall position in a currency. High volume transactions are automatically qualified for lower margins. If so required, several quotes in various currencies can be analysed on the screen simultaneously.

Moreover, top FX customers (largest volume makers) receive access to a ‘quote streaming’ functionality where bid and ask quotes can be followed against the changing market rate. Such customers have also direct access to the bank’s trading desk for very large transactions.

Except for FX spot and ante spot deals, FX forwards are offered to customers who have been granted a treasury limit by the bank.

Defining Business Strategies

Transaction banks use various strategies to introduce internet dealing platforms. They vary from rationales justifying the very introduction of a service (e.g. FX spot and forward) or at least of the internet as an additional sales channel, to long-term strategies placing the platform in (or sometimes thoroughly changing) the bank’s general business plan regarding acquisition and cross-selling to corporate clients over the next three to five years.

It is obvious that thousands of new SME clients could not be serviced over the phone by the bank’s corporate dealing personnel. Increasing the dealing staffing is not an option, since gross margin from FX transactions is under constant pressure and it is expected that within a few years almost no traditional FX deals with customers will be profitable for the banks if not self-serviced via the internet.

Moreover, there are great hopes associated with web-based FX dealing:

Internet access reduces transaction costs tremendously, because it opens the FX market to new volumes, consisting of very small transactions, previously not traded with a dealing room in an autonomous way (except for currency, conversion to which a fixed daily exchange rate was applied). The platforms are regarded as very powerful acquisition tools since they require no preliminary conditions (like financial analysis or decision on granting limits) to be fulfilled.

A typical medium-sized Polish bank without an FX platform usually opens no more than 250-500 new FX relationships per year. Moreover, approximately only 20% of the bank’s small business customers have a meaningful potential for foreign trade. The bank’s aim is therefore not only to boost its FX trade but also to be able to capture all this trading potential effectively. An internet platform is the answer to both questions.

The yearly average FX spot turnover of a small Polish corporate client (from €1.2-8m in turnover) active in foreign trade can be estimated at €500,000. With the FX margin ranging from 0.2% to 0.3%, this amounts to €1200 of bank’s gross profit margin per such customer yearly. It is expected that during the first year of a platform being operational it will enroll at least 400 customers, although it is not impossible to acquire 4000 users. However, it has to be remembered that if a platform is offered as an autonomous service (being often the only relationship between the company and the bank), then it requires continuous acquisition of new customers, as the yearly churn may hit 25%.

Obviously, access to the internet is not sufficient to join a banking internet FX platform. It has proved to be a challenge for some banks to simplify requested documentation and to streamline the process of concluding proper agreements between the clients and the bank.

For almost all of the banks it was the dealing room behind the initial business strategy of the platform that swayed them The attitudes towards internet have from the appetite for reaching thousands of new SME clients, to the fear that new channel would make the bank’s dealers redundant. Regardless of attitudes, the strategies, not to mention the practical implementations, differ substantially.

Selected Strategies

The two early movers, Citibank and Raiffeisen, have concentrated on opening as many new FX relationships as possible. Their main targets were SMEs that could not be easily accessed by the bank without an internet platform. Whereas Citibank focused initially on the increase of cross-selling to its corporate customer base, Raiffeisen concentrated on the fast acquisition of new customers even those only interested in FX transactions (the bank publicly declared that at least 60% of the platform’s users were new customers).

It soon became obvious that the internet levels the playing field, allowing smaller players to compete with stronger ones. In 2008 two banks that at the time had no corporate clients at all - Bank BPH and Alior Bank - decided to join the race, using their newly introduced FX platforms as key acquisition drivers. This move doubtless not only flattened FX margins in the market but also motivated other banks to launch their own internet platforms as soon as possible.

Two later movers, implementing their platforms at the end of 2009, were Millennium and BRE Bank. Millennium introduced the platform aiming primarily at small customers with the need for FX contracts. The self-service internet option was to be offered mainly to clients previously not serviced by the bank’s dealers. Although the platform is being distributed together with the corporate staff, the dealing’s room autonomous offer has been the primary service.

BRE Bank applied a different launch strategy, introducing its FX platform selectively and gradually as an additional medium of FX transaction execution. The new application is being offered to new as well as to current customers alike. The dealers and the relationship managers are jointly responsible for sales. Although the platform is an independent application, the single sign-on principle is considered as the opportunity for the customer’s deeper relationship with the corporate bank. The bank plans to cross-selling its other e-services, capitalising on a transactional platform that already integrates inter alia accounts, payments, collections, cards, discount financing and trade finance services.

The latter strategy seems to be the natural long-term choice for specialised corporate banks, since the coming years will press for deeper integration of corporate transactional services and more sophisticated value-added features, resulting in:

The amalgamation of outgoing foreign currency payment with FX transaction in a single execution process. Integration of incoming foreign currency payments with the choice of the account to be credited (based on the FX contracts available on the moment). Predefined conversion conditions between accounts held in various currencies.

The list of banks offering FX trading platforms is definitely not closed. However, it is already quite late for such implementations, not only because the market appears already saturated but also due to the prospect of Poland joining the eurozone between 2015 and 2020.

It is expected that smaller local banks, representing prominent banking groups, such as Societe Generale or HSBC, will not introduce local platforms in Poland but will rather make their global FX trading application available to Polish corporate customers. Whether these platforms will bring the wind of change to the local market remains to be seen.

Improving Payments Traffic

Although majority of FX deals is made in the spot mode, a meaningful part of exchange operations is still made ante spot, for the purpose of the immediate foreign payment execution. Regardless of the requested mode of delivery of the purchased currency, there are therefore companies which prefer the banks offering later cut-off times (COTs) for foreign currency payments. The earliest COT for non-single euro payments area (SEPA) cross-border credit transfers in Poland is around 13:00 local time (UTC+1 in wintertime and UTC+2 in summertime). However, in case of fully automated processing of foreign payment orders, the COTs for corporate entities may even reach 16:00. Obviously, in later afternoon hours there would be more FX transactions made, with the banks having COTs around 15:00 than with those with COTs fixed around 13:00.

Other improvements in banking payments traffic, such as introducing same-day transfers (beneficiary’s bank credited on the same day) in all currencies traded, shall also follow. Although SEK, DKK, NOK, CHF or CAD are relatively popular in trading, same-day transfers in these currencies are not always available in the banks offering internet FX trading platforms. Further automation and better management of liquidity in these currencies by banks is therefore to be expected.

Coming Innovation

Every internet trading platform is set to expand the list of instruments to be traded. Starting from FX spot and ante spot (for as many pairs of currencies as could be requested) it first turns towards FX forwards (requiring granting a treasury limit) as well as to term deposits. Investment funds and over the counter (OTC) instruments could follow.

However, introduction of new tradable instruments is definitely not the only field of innovation. Even more important will be new functional features that we shall see in the months and years to come.One of them is a transaction that would be automatically effected if a target exchange rate appeared within a pre-defined period. This feature of an automatically aided FX management is likely to be developed further, towards more interactive service. The customer will soon be able to set up their preferred rate of exchange or be automatically informed of the favourable movement of exchange rate (e.g. by a pop-up or by another type of message) whenever such rate or the movement occurs. This messaging functionality would open internet trading platforms to other channels of communication, such as email or SMS.

Vast potential for innovation also lies in the integration of FX and payments. An exchange transaction (against the constantly floating rate) should become an integral part of the payment execution process. Today, the standard cross-currency payment involves the exchange against the rate that the bank sets up one or two times a day. The integration would allow the payer to make an exchange against the continuously floating rate without the need to switch between payment and trading applications.

FX trading platforms are definitely 'on the wave' in corporate banking at this time. The years to come will bring more tradable instruments, new functional innovations (including messaging by the dealer or client-bank chatting) and integration of trading platforms with other banking applications. It is time to make this vision the reality before another tide of financial services automation (most probably consisting of a mix of e-invoicing and discount financing) arrives.