We take a detailed look at how banks are relying on their institutional trading divisions in London, and how this is driving their share prices to the top of the FTSE 100 index.
London is the epicenter of the world’s institutional and interbank FX sector, and likely always will be.
Aside from the long established retail brokerages with multi billion pound market capitalization figures, the non-bank institutional FX business is very London centric, and the Tier 1 banks that provide liquidity to prime brokerages, ECNs and aggregators around the world is completely London centric, the largest interbank dealers positioned in Canary Wharf responsible for 49% of all global FX order flow.
Whilst retail divisions of British banks decline, and the moribund nature of branch banking in the high streets the length and breadth of the country is visible on the countenances of the staff and by the thick fug of lethargy that hangs in the air above the 1970s formica desks with bakelite pens attached to their base stations by silver ball-bearing-adorned chains, the very same banks whose employees count their days until retirement and whose apathy coined the phrase ‘The computer says no’, are flourishing with their shares topping the FTSE 100 this week.
Why is that?
Well, it certainly is not retail banking. That is a millstone around the neck of many banks. It is expensive, has high real estate and staff costs, and deals with provincial retail customers with small deposits, small loans with low interest (ie not a profit-leader for banks) or those with large debts.
No. Barclays, RBS, HSBC, Lloyds and Standard Chartered, all among the very largest FX dealers in the world, are at the very top of the league when it comes to increases in share prices recently largely due to their unfaltering grip on the world’s electronic trading market, and the efficiency of the business that comes with that.
One office in Canary Wharf, with a few desks of specialist derivatives traders and a department which maintains relationships with prime brokerages and aggregators, along with some astute risk management means one building per company, and the lion’s share of the daily $5.5 trillion notional volume that ensues from electronic trading. The absolute antitheses of retail banking.
Indeed, banks are becoming very averse to extending credit to OTC FX firms, Citibank, the world’s largest interbank FX dealer by market share with over 16% of the entire global FX volume being executed at its offices in Canary Wharf, however regardless of that, it is clear that the large banks are relying on a commission and spread business rather than a retail banking business for their revenues.
Barclays and HSBC are both among the five greatest risers this morning among all companies in all sectors with stock listed on FTSE 100, while shares in Lloyds, RBS and Standard Chartered are up as well.
Barclays is currently up 2.4% at 173.25p, HSBC is up 1.8% at 567.7p, Lloyds is up 1.5% at 59.73p, RBS is up 1.4% at 202.8p and Standard Chartered is up 1.2% at 640.3p.
Barclays, HSBC, RBS and Lloyds are also currently trading at their highest point in the last month, although Standard Chartered hit a peak of 668.2p when the market closed on August 9.
Want a bank account? No chance….
It is becoming increasingly difficult for new FX brokerages, and FX service providers wishing to diversify into the brokerage sector to be able to establish bank accounts with mainstream financial institutions.
Whilst this is not necessarily a new dynamic, a recent investigation by FinanceFeeds has uncovered that banks in regions that are very populous with FX industry participants are becoming very strict with regard to the risk management aspect of allowing any entity associated with the FX industry to open bank accounts.
This ranges from brokerages, to signal providers, technology vendors and developers of ancillary services, once the words ‘retail FX’ come about, the banks retract.
This is further testimony to banks concentrating on their core business model – that being the Tier 1 interbank electronic trading desks and not the enablement of retail businesses, even of those who utilize their liquidity and effectively are ‘liquidity partners’ in the electronic trading ecosystem.
HSBC and Barclays demonstrated an interesting dichotomy: FX trading is for banks only!
When explaining to HSBC’s business banking representative via the telephone banking service, the representative did not know what FX trading was, despite the vast majority of the world’s liquidity providers, FX brokerages and supporting businesses being based in London.
After a substantial period of time on hold, having explained in granular detail what FX trading is, to a representative of the business banking division of HSBC, the company which overtook Citi to take the number 1 slot as the largest global interbank FX dealer in 2015 with 5.4% of all global FX client volume executed electronically via its single dealer platform, the reply came back “Retail FX firms are not entities that we deal with unfortunately.”
Answers from Barclays, whose BARX interbank FX platform is third in the world in terms of interbank FX market share, echoed those of HSBC. According to a representative at Barclays business division today, FX brokerages are outside the company’s remit.
Selecting a specialist business orientated bank with an ethos that serves clients via recommendation is also anathema to the FX industry, it seems.
A meeting with Handelsbanken, which does not have High Street branches, yet operates across the United Kingdom, via referal from existing customers only, deduced that the same outcome would be proffered should a corporate customer approach the bank for a client account or operational capital account if that client was a retail FX firm.
“Unfortunately we are am unable to open an account for a company in this business. Whilst the paperwork all looks in order, these regions are high risk in relation to our risk assessment on money laundering. Handelsbanken’s business model is to operate in local markets with customers operating in those local markets” came Handelsbanken’s response.
“In effect I can’t build a case to support the bank dealing with Directors based outside my local market in a country with a high risk rating” continued the Handelsbanken representative.
“This does not help your requirement to open a bank account in the UK and I suspect that you will find that you get the same response from most UK banks” he concluded.
Clearly, whilst very frustrating, this is proving profitable for banks.
FinTech development is the preserve of the FX world for non-bank innovation, and the banks for bank-related innovation
Additionally, following the 2008 crisis and the advent of Fintech, business to business relationships in finance have progressively grown towards the digital world, threatening the banking status quo. In layman’s terms, banks are not burdening themselves with development of non-bank FinTech – instead growing their own bank related FinTech – yet again in London, nowhere else – and relying on FinTech leaders in the non-bank world to innovate for who will then become their customers, ie the retail FX businesses.
FinanceFeeds reported recently that 31 percent of the SMEs are unaware of other providers aside from traditional banks, meaning there are still plenty of potential clients to engage in the FX business. Less finance and tech savvy countries will probably show even higher figures.
Jonathan Quin, CEO and Co-Founder at World First spoke out on the subject, stating:
“Whilst SMEs have historically had to rely on the big banks for any sort of financial service, genuine innovation and technological development from the FinTech sector has given rise to a wide range of truly compelling alternatives. This new breed of specialist providers are often better placed to serve the needs of SMEs than traditional banks, offering greater flexibility for the user, more transparent pricing and, ultimately, better value”.
In late 2015, a joint research study by Mysis and Efma had also concluded that Fintech companies are forcing banks to adapt and adopt digital methods as well.
“The retail banking industry is in flux. With the rise of the internet and connected devices, the industry has been prophesying the demise of traditional banking for almost a quarter of a century. Yet, today, many institutions remain poorly equipped to keep pace, let alone take advantage of digital banking”, revealed the joint research study from Mysis and Efma.
Unlike many established online retailers, banks continue to rely mostly on branches for customer acquisition, accounting for 41% of sales, followed by word of mouth (21%), and advertising (20%). Online banking in-app advertising (5%), online comparison sites (4%) and mobile banking in-app advertising (3%) come to a total of 12%.
“By 2018, millennials (current 18-34 year olds) will have the highest spending power of any generation. And by 2025, three out of every four workers globally will be a millennial. These digital-natives check their smartphones 43 times a day, on average”, said the paper, revealing that by then, bank sales via digital platforms are expected to rise, with 9.2% of firms expecting over 50% sales through digital. Still, 61% will be below the 25% threshold.
“Core banking technology is critical to connecting the front, middle and back office in a way that transforms banks into truly customer-focused, profitable sales operations. Core banking technology must address today’s customer and feature digital channels at the heart of the solution in order to future-proof the banks’ software investment. ”, said Vincent Bastid, CEO at Efma, noting that core systems are precisely the biggest technological barrier to 61% of banks, which leaves 71% of retail banking executives in the US considering non-traditional competitors as a threat.#ftse100, #fx, #interbank