Partnership is Better
Martin Hood, UBS
Based on partnerships both within and beyond UBS, "The Bank for Banks" programme offers other institutions an effective way to keep infrastructure costs in check.
Bankers are under pressure. Many pressures, in fact. Clients demand more, volumes are volatile, margins are shrinking. New technology delivers as many headaches as it brings solutions. Greater efficiencies add to the pressure on margins, while IT budgets burgeon. At the same time, regulatory and systemic changes multiply the cost burden. Qualified financial intermediary status, continuous linked settlement, know-your-customer rules, and anti-money laundering legislation are just a few examples.
In essence, bankers are impaled on the horns of a classical dilemma. To compete, they have to expand the range and quality of their service offering. Yet, to survive, they have to move to a more economical cost structure. As the costs of investing in infrastructure rise, these two imperatives - delivering enhanced services at lower cost - become ever less compatible.
On the cost side, banks have a limited number of options. They can cut back on internal expenses, which will work only if business volumes yield the "critical mass" needed to cover their fixed costs. Or they can team up with other institutions to create jointly owned "transaction banks". But the recent shelving of two such projects in both Switzerland and Germany suggests that their price-tags could be a deterrent.
Mergers are often sold on the merits of potential cost savings, but here too the attendant risks are high. That leaves banks to follow the route long ago pursued by manufacturing industry - namely, sourcing from other providers. Just as car manufacturers buy in their batteries and tyres from subcontractors, so banks can and should outsource transactions processing when it no longer makes economic sense to maintain the necessary infrastructure in-house. Banks that accept this logic are increasingly looking to "UBS. The Bank for Banks" for solutions of this kind.
Launched in 2001, the programme is designed around UBS’s 3,000 or so correspondent banks, particularly the smaller or medium-sized institutions. The offering takes the form of a partnership by which the client institutions take advantage of the UBS service platform to support selected parts of their value chain - parts which can range from cash, currency, and securities management through to sophisticated risk management services.
It is worth mentioning here that "The Bank for Banks" is not an operating business or division of UBS. Unlike the global transactions services business of Citigroup, for example, UBS has not chosen to bring its back office services for cash management, custody and trade finance into a single unit. Instead the programme draws on seamless integrated cooperation across all UBS business groups to create solutions for its external partner institutions. Effectively, clients are benefiting from the same level of expertise and technology that UBS invests in to support its own businesses.
Whether those solutions involve isolated services or entire packages, the economic advantages are the same. Partner banks stay focused on their main business and client relationships while UBS acts as the interface for such activities as foreign exchange or securities trading. Naturally, UBS can also handle related functions such as trade execution and settlement, clearing, and global cash and securities custody.
The advantages of outsourcing accrue at several levels. First, partner banks can cut back on infrastructure investment and operations costs. An example here shows the scope of the possible savings. Before one Swiss institution teamed up with UBS, it was dealing with more than 100 brokers and more than 80 custodians in order to buy and sell securities on behalf of its clients.
Today, UBS acts as the counterparty for the bulk of this business, with the institution retaining client contact, client booking and a few residual direct links to other brokers and custodians. Account reconciliation and trade execution were therefore greatly simplified. The advantages of outsourcing do not stop at cost savings, important though these are. In the above example, the partner institution was also relieved of the need to continuously assess and monitor the creditworthiness and reliability of a large number of counterparties. The workload of its network managers was therefore greatly reduced.
To take another example, any institution signing up UBS for its securities services gains access, at a stroke, to more than 50 different stock exchanges round the world, all via a single counterparty. Effectively, participating institutions can outsource their entire order flow - including execution, settlement, clearing and custody - while keeping control of the all-important advisory relationship with their clients.
For its part, UBS benefits from these partnerships by the more efficient use of its own processing capacity. In this, the bank finds itself in the position of any owner of capital-intensive plant such as a car factory or semiconductor foundry. The more intensively the infrastructure is utilised, the more attractive its economics become.
The economies of scale available to a large institution are considerable. In the case of "The Bank for Banks", UBS clears over 50 per cent of cross-border Swiss franc-denominated payments. In addition, the bank is a leading participant in the euro and US dollar payment systems. When it comes to securities clearing, the bank is a major domestic custodian, accounting for some 60 per cent of the Swiss franc-denominated custody market.
At the same time, the firm’s centralised foreign exchange, money market, and securities infrastructure mean that UBS can negotiate more effectively with external counterparties than its partner institutions could if acting on their own account. All this implies scale economies and pricing power that benefit all involved in "The Bank for Banks".
The principle has worked to dramatic effect in the foreign exchange business. Forex is a classic case of a marketplace for standardised products with wafer-thin margins. As such, it is attractive only to participants who can maximise volumes while keeping costs to a minimum. UBS has responded to this challenge by centralising its foreign exchange processing, honing the efficiency of its trading and distribution platform, and building on an already strong position in the market. The quality of its offering was rounded out by innovative services such as FX2B, a fully- electronic trading, settlement and clearing channel for forex transactions.
Earlier this year, these efforts were rewarded when Euromoney named UBS as the world’s top foreign exchange bank, with 11.5 per cent of the global market. The statistic that really stands out, however, is the bank’s position among non-market-making banks. That, of course, is the very clientele for which "The Bank for Banks" was designed.
At close to 19 per cent, UBS’s share of this market sector came in more than 10 percentage points above that of the runner-up, suggesting that the UBS approach to foreign exchange has found an enthusiastic response among smaller and medium-sized institutions. There is a further point. By patronising the UBS platform, these banks have helped to create the conditions for the mutual success of "The Bank for Banks" and its partners. That is what we mean by the slogan: "Competition is good, but partnership is better".
Entry Filed under: Custody