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Banks must focus on liquidity, good service to stay relevant a decade from now

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Banks must focus on liquidity, good service to stay relevant a decade from now

If incumbent banks want to maintain their market position a decade from now, they must capitalize on liquidity, the key asset that differentiates them from nonbank rivals, according to industry veteran Nick Ogden.

In addition, improved customer service to match that of the competition is an important area on which banks should focus, Ogden said at the World Banking Institutes Conference in London on Sept. 17.

With the rise of technology and online services, traditional banks are facing more competition from alternative financial services providers, while established companies across sectors are also able to satisfy customer needs faster and more efficiently, panelists said.

Competition does not only come from financial technology or big tech companies but from all organizations which "trade in the very important currency of customer trust," Sabrina Del Prete, founder, and CEO of Kore Labs said. Banks have become like the family dentist, whom you trust but do not want to ever visit, she said.

Ensure standards of service

Ogden, who founded payments processing firm Worldpay Inc. in 1997 and sold it to Royal Bank of Scotland Group PLC in 2002, is on the board of directors of ClearBank Ltd., which he also founded.

To stay competitive, banks must recognize where their core strengths lie. Customers are a key asset that banks have forgotten to recognize but should work hard to capitalize on, Ogden said.

One of the challenges the internet has delivered is that consumers can get anything anywhere at any time, and expect from their banks the same service levels they are used to getting elsewhere, Ogden said.

"Which bank in this room can say they have a service level agreement that they deliver to their customers? I have yet to find one that has that," he said. Yet in all other industries, service level agreements, which define the service standards a provider is obligated to meet, "are the norm," Ogden said.

Leverage liquidity

Another key strength, which every bank "sits on," is liquidity, he said. Interbank liquidity is still "invisible" as the exchange of cash flow information between banks remains opaque even after the global financial crisis when bankers were worried about waking up to find that their counterparties had gone bankrupt, Ogden said.

The global financial crisis of 2007/08 and the subsequent sovereign debt crisis in the eurozone in the early 2010s were marked by severe disruptions in the interbank markets. A World Economic Forum study found strong tightening in funding access, volumes, maturity, and prices following both the Lehman Brothers collapse in September 2008 and the eurozone crisis after April 2010, with substantial differences in interbank prices for the same borrower in the same morning during the crisis periods.

"These results suggest that bank-to-bank frictions impaired the functioning of this market severely, in particular for cross-border transactions," the study said. The authors said that empirical evidence on the turmoil in the interbank market was scarce, mainly due to the relative lack of comprehensive micro-datasets since wholesale transactions are mostly over-the-counter.

More interbank transparency

A study released in November 2017 by French academics Karima Bouaiss, Catherine Refait-Alexandre and Hervé Alexandre, which analyzes the effects of banking transparency on financial stability, concluded that "greater transparency reduces the probability of systemic banking crises" and "the measures that improve transparency increase financial stability or at least limit the accumulation of bad debts."

In its post-crisis reform package, the Basel Committee for Banking Supervision put a special emphasis on practices at banks that promote greater transparency. The BCBS requires banks to publicly disclose "information on a regular basis that enables market participants to make informed decisions about the soundness of their liquidity risk management framework and liquidity position."

The future

"Just imagine for a minute, looking forward to 2029 what would happen if liquidity was visible between banks, that you knew when the cash flows and, as a consequence of knowing where the cash was, you could do interbank payments for your customers globally in bank segments," Ogden told the conference.

This is achievable because companies such as TransferWise Ltd. and Revolut Ltd. are already doing it, Ogden said. But they way they are doing it is with their customers' liquidity which they put in bank accounts.

"So this is a key asset that we as bank sit on. If we leverage and start to share that asset, share that knowledge, open up the trust between banks in a way to be transparent about services that we can deliver to customers who inherently trust us, we can transform," he said.

"Why do I believe that could happen? Because PayPal Holdings Inc. still does not allow you to pay your salary onto it," Ogden said . That is the future banks' can take if they wanted to, he said. "If we don't want to take it, we don't care about service levels and we ignore the assets we have got, then we face the fate which we deserve."