I was surprised to see friend of the Financial Services Club Carole Berndt leave Royal Bank of Scotland (RBS) for Australian shores in January (actually Hong Kong with ANZ). Even though she’s an Aussie, the surprise was that Carole had only moved to RBS to shake up their Global Transaction Services (GTS) business the year before, having been specifically poached from Bank of America Merrill Lynch for the role.
Something was up and the radar wondered what?
That was answered the other day when RBS announced their 2014 results. Most of the headlines focused upon the news about the investment bank operations closing. The Financial Times reports that four out of five jobs will disappear in RBS’s Global Markets Division by 2019, amounting to over 14,000 job losses. The Guardian notes that this will impact overseas operations dramatically, as RBS pulls out of 25 of the 38 countries it currently has operations. But the most dramatic part for those of us in payments, is that RBS is closing its GTS operation.
Most of us wouldn’t have spotted this, as it wasn’t reported much. There was just one line hidden in the Wall Street Journal that gave it away: “As part of reducing its investment-banking footprint, RBS plans to sell or wind down its cash-management and trade-finance businesses outside of the U.K. and Ireland.”
The import of that line was lost on me until a few friends reached out and asked if I’d noticed what was going on. The low-down appears to be that McKinsey, or some other large consultancy, have taken a close look at all RBS operations and structures and have determined that there’s no money to be made in transaction services. I've assumed it is McKinsey, as that is the bank's preferred shredder these days, but it may be another for all I know.
That comes as a surprise as many of us, me included, thought that the ABN AMRO global payments processing capability was the jewel in the crown. How times have changed.
So here’s what I’m hearing.
RBS had this big consulting company look at all their operations and, when it came to transaction services, they found that this has been a good solid business in the past. Eking out a regularly and predictable profit, it became liked by the banks that emerged from the crisis, after the madness of their investment jungles started to fall apart.
I likened it to chickens and lions. For example, when the Independent Banking Commission Report came out in 2011, I noted that ring-fencing was like separating the chickens from the lions:
I see it as like separating the jungle from the farm. The jungle is the investment bank; the farm is the retail bank. The jungle is full of dangerous animals that can kill you; the farm is full of nice things, like chickens and cows, which you control. The jungle is full of risk and excitement and, if you come out the other end intact, you can reap big rewards; the farm is open and easy, with everything under control and reliable results the expectation.
So all the banks wanted to get back to nice boring banking, and production of predictable results from transaction banking has been a big part of that. For example, at SIBOS in 2009 (Hong Kong), I was surprised to see Citi proudly talking about their $1 billion investment in transaction banking during the past year. Surprised as they were one of the big losers in the crisis but, when I asked about it, justified as transaction banking is where the profitability lies.
Six years later, it doesn’t. What’s happening?
Reading between the lines, as I have no official knowledge in this matter, I’m guessing that this big consultancy firm analysed the GTS business and concluded that, in light of the world of today, transaction banking is a long-term loss leader for investment banks. For banks that are not global and have no interest in investment markets, it makes no sense.
This is because the large brokers and market makers need liquidity and liquidity is disappearing fast. What with Basel III’s tightening of leverage along with the introduction of liquidity coverage ratios are making it harder and harder to make a buck. I noted this recently when talking about the future of the City being run by a man and his dog. Even in the areas where money should be made – high frequency trading – liquidity and profit has been disappearing fast.
“As much as two-thirds of all stock trades in the U.S. from 2008 to 2011 were executed by high-frequency firms; today it’s about half. In 2009, high-frequency traders moved about 3.25 billion shares a day. In 2012, it was 1.6 billion a day. Speed traders aren’t just trading fewer shares, they’re making less money on each trade. Average profits have fallen from about a tenth of a penny per share to a twentieth of a penny.”
Why does this make a difference in transaction services? Because with less liquidity and less trade, there’s less settlements and less processing. Banks, as a result, are starting to give away their transaction processing profits to attract liquidity of trading. If you don’t offer investment services, then your now stand-alone transaction services become pointless as they need to be offered for free to compete. It’s not only not making a profit, but a major loss as costs have increased substantially at the same time.
What with the Payment Services Directive (PSD) in its second round asking banks to give away their account information to third parties and SEPA enforced but still to make any return on investment, it’s a challenge. Add on to this a raft of lean and mean and aggressive new players including PayPal, Stripe, Currency Cloud, Transferwise, Klarna and more and you have a problem as, unless you’re a bank with global investment and trade services, there’s no point in having global transaction services. All you need is national servicing.
So, in the case of RBS and its' GTS division, it doesn't make sense to carry on a global business when you are becoming national. After all, transaction banking if managed properly is a profitable, low margin business. If your objective is to create shareholder value, then your low margin business is the first business to be axed. This is sound business logic.
If you add to that the regulatory changes (SEPA, sanction screening, Basel III, risk mitigation) which have increased the costs and the increased competition (all banks and new providers are focused upon this space) has reduced pricing, it’s not a surprise that transaction banking is under pressure. We have seen this in the past with cards acquiring. That doesn’t mean this is a bad development: new companies like Worldpay, Chasepaymentech, Global Collect and Adyen have arisen. Might this happen again, but now for payments? Global Pay? It makes sense, I guess.
And that’s exactly what seems to be happening at RBS. It’s retrenching to become a significant UK Retail and Commercial Bank but, when it comes to overseas, they’re out of there. They’ve sold off Citizens and many other key assets, and are now divesting their investment bank and transaction bank aspirations. It’s not being sold, but just shut down.
Current corporate clients are being told to make plans elsewhere with other banks, whilst any that want servicing by RBS have to deal with them through the NatWest systems in the UK. The large bulk of staff in Amsterdam from the ABN AMRO days are being laid off (about 600 out of around 650) and the whole operation is scaled back.
So one of the world’s top ten banks by market capitalisation, global coverage, assets under management and scale in 2007 is now an itsy-bitsy UK bank and a shadow of its former self. And what was the jewel in the crown of the bank in 2007 – ABN AMRO’s wholesale and transaction banking business – is now buried in the ground.
How times have changed.