Overcoming the profitability challenges of your corporate banking FX franchise

smartTrade’s FX, FX options, fixed income, crypto and money-market solutions are used by banks, brokers, asset managers and corporates. These customers are now demanding more sophisticated solutions to help minimise their risk, streamline and simplify their operations, and grow their own and their clients’ businesses.

Ludovic Blanquet, smartTrade’s chief product officer, highlights the impact of industry competition on banks with corporate banking franchises. Bank clients no longer work with just one bank, but through multiple distribution channels. As a result of this change, banks have needed to redesign their services, offering prices across multiple channels such as single-dealer and multibank portals. and mobile applications.

“smartTrade has identified the challenges that come with multiple distribution channels,” explains Blanquet, “and we are investing heavily in this space to deliver user journeys tailored to each client type, whether that be corporate, multinational corporation, small or medium-sized enterprise (SME), high net worth or retail.” Flexibility and the ability to adjust workflows on the fly, he adds, are key requirements for smartTrade’s customers.

Dynamic margin management has become central to client attraction and retention. Many banks, however, are not yet equipped with the sales management tools necessary to attract and retain clients – that is to say, tools that help provide dynamic yield and attractive prices. “Many banks have multiproduct relationships with their clients,” Blanquet explains, “which they need to take into account when trading FX for those clients. Margins have been under pressure for many years, with FX regarded by some banks as a loss-leader, while the margins they receive from other financial products tend to be much higher. Therefore, they need a margining system that consumes data from other parts of the bank to account for the different margins they receive from the various financial products. smartTrade is investing in the development of a sophisticated, dynamic margin system that is convenient for the business to manipulate and adjust in real time.”

Banks with corporate banking franchises often choose between two main approaches to risk and growth. Both are providing liquidity to the franchise to keep margins as the focal point, while maintaining FX flows reaching the trading desks. Banks with a medium-sized corporate banking franchise may use FX as a loss-leader, since they gain margins from their trade financing and lending businesses. They will operate with minimal risk, depending on geography. Larger banks with broader and more diverse corporate banking franchises, on the other hand, are able to take more risks and can therefore run these franchises as actual profit centres. smartTrade’s LiquidityFX provides banks with extensive capabilities whether they prefer back-to-back or skewing pricing.
John Stead, smartTrade’s global head of pre-sales, explains how banks can struggle to understand their clients and match their orders to the correct execution feeds, orders and hedging algos, potentially challenging the profitability of the franchise. “Each client’s flows are unique in terms of their reasons to trade style, toxicity, pair and size,” he says. “When hedging client flows you need to consider if this is good, neutral or bad for my liquidity partner relationship. Do you have the tools to distinguish one from the other? If you don’t even know the risks, you can damage your liquidity partner relationship and, ultimately, your business profitability.”

One of the key obstacles to profitability for a corporate banking franchise can be the use of a middleman, a multibank platform (MBP), to obtain liquidity from the bank. MBPs charge a significant fee for the service of connecting buyers and sellers and, for some banks, this fee can be one of the biggest costs of doing business, impacting revenue from FX. According to Stead, this gives neither banks nor corporates a fair deal. “These hidden costs to the banks are huge, making some corporate business almost unprofitable,” he says. “Although the costs to corporates seem low, in fact, they are hidden. Some bank costs inevitably trickle down to corporates. Conflicts of interest faced by MBPs earning money from each trade mean that they favour or promote high revenue feeds, and some liquidity providers may not be available if they are seen as competitors.”

Ludovic Blanquet notes that banks are becoming smarter at concentrating their FX flows across all activities (retail, SME, wealth, corporate, lending, import/export financing and cross-border payments). Because of this, he expects new workflows and services to emerge, such as auto hedging of forecasted cashflow for corporates, lower payment fees on monthly recurring cross-border payments and structuring of the FX components of import/export financing.

“smartTrade is keeping track of all of these market developments”, he says. “We are engaging with our customers to develop the tools required to cater to the evolving needs of their clients.”

John Stead is keen to point out that smartTrade is a signatory to the FX Global Code – common sense guidelines and procedures for vendors, banks and all market participants should adhere to as they grow their businesses. smartTrade is committed to two key principles of the code: to abide by its spirit and letter, and to provide technology and solutions that enable clients to do the same. To that end, smartTrade’s procedures and processes are specifically designed to minimise risks to counterparties. “That should also be good for business overall,” says Stead, “which is a win-win for all parties.”