smartTrade

Competing in FX for Regional Banks

This article is authored by Chris Gibson, Director of Payments and Sales Enablement at smartTrade. 

Regional and community banks face formidable competition for FX revenue from larger banks, hungry fintechs and FX brokers. JP Morgan alone reported $5.5 billion in FX trading revenue in 2023, which exceeded the net income of all but nine other US banks in that year. While an inexact comparison, this does illustrate the challenge regional banks face when competing against their national counterparts in FX and cross-border payments. While they may vary in size, geography, client base, and strategies, all banks have an interest in serving their customers and earning revenue. In the competition for FX revenue and satisfying client expectations, regional banks have an opportunity to leverage their strengths and pursue a variety of tactics to succeed against much larger rivals.

Regional banks have a number of advantages over their larger competition. These include local knowledge, stronger customer relationships, faster and more flexible decision-making, and the ability to tailor their product offering and expertise to local requirements. Set against these strengths are a number of challenges facing regional banks when building an FX franchise. These include:

  • Nostro Costs: maintaining a single foreign currency nostro can cost in excess of $30,000 annually. Dealing and paying in multiple currencies can be a much more significant expense when set against a smaller revenue line. 
  • Similarly, accessing FX liquidity incurs costs from spread, pre-funding, risk management, and administration. 
  • Technology Costs: not only the underlying systems for accessing FX liquidity, managing risk, payments, and compliance but also the costs of integrating these systems and maintaining adequate backups. 
  • Staff: the entire value chain of an FX transaction or cross-border payment requires the participation of bank staff across a range of functions. Maintaining an FX sales desk alone–with even modest trading activity–requires two to three full time employees (although these employees may wear several hats within a larger commercial or international desk). 
  • Regulatory Burden: the regulatory discount is fast disappearing for regional banks. KYC and AML regulations, sanctions screening, and FX reporting requirements can land more heavily on banks with fewer legal and compliance resources.  

What tactics and avenues for growth can a regional bank employ to leverage its strengths and overcome its weaknesses? There are some general and some more specific tactics. On the general front: 

  • Say ‘yes’. If you say ‘no’ often enough, eventually clients will begin to believe you and make other arrangements. Fortunately, the reverse is also true. Find those incidents and situations where ‘no’ has been the stock answer and find a means to change that answer to yes as often as possible. This is perhaps the easiest way to uncover existing FX revenue that is going unclaimed. 
  • Go after the low-hanging fruit. This is a variation on saying ‘yes’. Regardless of size, client mix, or geography, there is always some demand for cross-border payments across all client types. FX revenue is being earned at some point on these transactions and it’s merely a matter of moving that revenue in-house. Additionally, these payments are typically at Spot and less competitive on spreads. 
  • Finally, make it easy and make it simple. There are a number of ways to do this but as a rule reducing the number of steps, systems, and time involved in a transaction for both clients and staff may be the most important revenue-building tactic in this space. 

Specific tactics include: 

  • Digitalization & Automation: integrated online, mobile, and branch platforms offering FX and cross-border transactions are the most effective and efficient method to deliver FX capabilities to clients. Within these digital platforms, automation of workflows for payment capture, verification, and release, FX pricing, FX hedging and risk management is the most effective method to reduce delivery costs, risk, and STP. 
  • Partnerships and Providers: liquidity providers, correspondents, and technology providers are essential to delivering FX and cross-border capabilities and can help level the playing field on functionality, nostro costs, regulation, staffing and other costs. 
  • Value-added Services: beyond basic FX and cross-border transactions, offering value-added services like FX risk management advice, hedging strategies, market insights and even additional products such as foreign currency accounts in a single platform is a compelling experience. 

Finally, define and focus on the needs of the most relevant client types and niches such as:  

  • Personal & SME: these are transactional clients dealing via request for quote and bulletin pricing typically requiring spot FX for cross-border payments. They are less price sensitive and value simplicity, ease of use, and immediacy. 
  • Commercial and Wealth clients have a similar payment-driven transaction profile but are more price sensitive, deal in larger amounts, and, in addition to spot, will enter into forward contracts and can graduate to more complex transactions. These clients value choice, value, efficiency.  
  • Corporate and Institutional clients have both transactional and financial FX needs and prefer to process FX and payments separately. These clients are much more price aware, often prefer multi-dealer FX platforms with streaming execution and employ more complex product types such as swaps and strips of forwards. Price and execution are key for these clients. 

How much revenue is at stake? There are a number of shortcuts for estimating potential FX volume and revenue. These include annual volume as a share of total assets (usually 25%) and annual revenue as a share of total assets (usually 0.1%). These methods, of course, do not account for regional differences, client mix, pricing strategies and several other factors but as a starting point can indicate the reward that awaits those banks that can overcome the challenges of competition, technology, and regulation to build a successful FX franchise. 

smartTrade’s Commercial Banking and Payments platform has consistently helped banks worldwide to deliver payments, FX, and cash management capabilities to clients of all types. Access liquidity and payment execution while presenting clients with a rich menu of FX and payments options that can be tailored to a wide range of users and use cases. CBP is designed to integrate cleanly and quickly with the infrastructure you have to enable the experiences your clients demand.