Strategic Sales Partners
Cooperation resulting in a clear Win-Win situation
“Indeed, it is better for investment and corporate banks to commit to a few product lines in which they can gain the pole position and succeed in today’s scale-driven, (often electronic,) winner-takes-all environment, rather than competing in too many areas and achieving only low, loss-leading market shares.”
Source: Boston Consulting Group, 2016
Hence it is fair to claim that most banks would really benefit from a cooperation with us!
Incentives for partners
To reach our set targets including the required minimum size on a global level for our core product RiskPool in the shortest period possible as well as to emphasize our long-term sales partnerships approach we came up with the Sales Option Pool concept (max 10% of voting rights and subject to dilution). This means that based on each sales partner’s performance in comparison to all other sales partners and our own direct sales we will allocate shares in a multi-stepped (short-, mid-, long-term incentives) approach in our business to strengthen the partnerships even further in a performance-related matter and give other financial institutions a more than attractive incentive to drive sales for us and hand over their customers FICC risk management part to us rather than selling those customers derivatives.Read more
Cooperation has many benefits
“The need for major investments in technology in several important markets means that investment banks are faced with stubbornly high CIRs (=Cost-Income-Ratio). In cash equities, FX, rates and commodities, for example, CIRs are running dangerously close to 100 percent. Under the additional weight of not only research costs but also high brokerage, clearing, and exchange fees (relative to other asset classes), profits have been severely eroded, bordering on breakeven in most years.
Indeed, industry operating profits are at historical lows across the board, down 28 percent since 2010 to just $68 billion in 2014 and falling further.
Ultimately, we do not see this downward ROE trend reversing, and we see ROE remaining below 10 percent unless major restructuring occurs.
We also believe that it is no longer possible to be all things to all people. Banks can hold key relationships with some clients and source products as necessary, and they can also maintain a competitive or pole position in other products. But the days of being both a relationship leader and a product leader in multiple products are over.
Positive customer perception
Offering a top-notch and disruptive third-party solution rather than selling outdated derivative solutions will earn those banks points in terms of customer happiness and confidence since RiskPool as an FICC mutual insurance is simply the leaner and more efficient solution.
Focus on strengths
Banks can now really focus on their core strengths or in case of today FICC-wise non-competing boutiques / FIGs win new customers while rounding of their product portfolio with a solid FICC risk management solution offered by us earning them a commission and/or coming with convincing barter deals.
Asset Management Fees
One of these mutual benefits is insurance asset management (a very high AuM figure is inherent to the RiskPool business model) on our behalf.
You might will also receive brokered business in complementary areas, as our solution requires access to the customers’ ERP system and relevant postings in real-time. Hence services in the fields of cash management, payments, trade finance and corporate finance or corporate underwriting can be brokered to banking partners/third parties via our add-on products (FinCaT, FundMaster, BiSure,etc.) who under current circumstances are very unlikely to ever be granted such wide-ranging and insightful ERP system access.
Challenges for investment and corporate banks
FICC revenues in the industry fell by 8% year over year (YOY), from $117 billion to $107 billion, reflecting a further decline in credit, commodities, and structured products. FICC profitability has fallen from 70% ($59 billion) to 44% ($26 billion) of the total profit pool over the past three years. Continued pressure on dealers’ ability to warehouse assets drove down revenues in credit, commodities, and securitized products by between 20% and 25% YOY. Foreign exchange (FX) and rates have been bright spots, benefiting from volatility related to changes in central-bank policy. Event-driven volatility in FX—specifically with regard to the Swiss franc, the Russian ruble, and the Chinese renminbi—has also presented dealers with an opportunity to reprice larger transactions, widening spreads to regain ground on their loss-leading businesses in smaller-ticket, highly electronic, major currency pairs. The introduction of mandatory derivatives clearing under the European Market Infrastructure Regulation (EMIR) has been a precursor to wider market change in the region. As seen in the US, trading venues and alternative liquidity providers will likely emerge to challenge investment banks and reduce margins. Generally speaking, the regulatory burden has fallen hardest on FICC, dramatically slowing a traditional driver of revenues.
New regulations that limit proprietary trading, such as the Volcker Rule in the U.S. and ring-fencing in the U.K., will undermine the ability of investment banks to act as market makers in the years ahead. Two extraordinary periods of extreme volatility—the first in October 2014 in U.S. Treasuries, and the second in January 2015 when the Swiss National Bank removed the Swiss franc’s three-year-old cap against the euro—caught some off guard, leading to sizable losses. The introduction of the Dodd-Frank Act in the U.S. is also hurting investment banks, driving volume toward new types of intermediaries such as swap execution facilities (SEFs), introducing less profitable modes of agency execution, allowing alternative market-making entities to gain a toehold, and fragmenting liquidity into regional pools. Further derivatives regulation is set to come online in Europe over the next two years, further intensifying pressure on the traditional operating model. Several institutions exited the commodities trading business already in 2014, continuing an exodus that began two or three years ago, and the few remaining players have gained revenues and market share as a result. But FICC businesses remain prohibitively expensive to run, with high front-office, technology, and operating costs. In foreign exchange (FX), more firms will continue to consider exiting the business or sourcing from other parties such as larger banks, as liquidity in the G-4 currencies becomes further concentrated among the leading firms. Thus, for the remaining, reducing the size of derivatives portfolios has been a particular focus, given that Basel III imposes a credit valuation adjustment (CVA) charge to address counterparty credit risk. The more punitive treatment of risk-weighted assets (RWA) under Basel III has obscured Capital Market and Investment Banking (CMIB) balance sheet reduction programs. In 2013, for example, banks reduced RWA significantly—but new standards meant that reported RWA remained more or less the same as in the previous year. Indeed, this was the intent. Banks want neither to reduce RWA excessively for fear of shrinking the bank nor to lag behind new standards, which hurts ROE. In 2014, RWA showed the most significant increase since 2011. This rise, combined with the negative revenue climate (non-FIG customers holding back) and the challenges in cost reduction, caused industry ROE to fall to just 7 percent. The low ROE may have been due in part to the continued “raising of the bar” by the Basel Committee. Alternatively, investment banks may have started to reinvest in less risky RWA to resize and rescale. One way or the other, however, investment banks must still reduce RWA to meet new standards. Stress tests, leverage and net-stable-funding ratios, FRTB, and global systemically important financial institution (G-SIFI) capital charges, as well as ring-fencing in the U.K. and intermediate holding company reform in the U.S., will all continue to pressure the balance sheet and, in turn, ROE.FRTB hits CMIB institutions hardest, imposing stricter internal risk models on derivatives and securitized assets, and further increasing the regulatory capital required. Therefore, it is estimated that FRTB will value today’s current inventory of RWA at an 11 percent premium in 2017, placing additional downward pressure on ROE. As a result, investment banks will likely respond, as in previous years, with balance sheet mitigation programs designed to keep pace with the regulatory agenda. In the absence of any such programs, FRTB would depress ROE to 6 percent, based on 2015 revenues. In short, with the ongoing regulatory schedule and the move to Basel IV, investment banks will be constrained in their ability to reduce equity as an effective lever for lifting ROE.
To round this picture up let’s have a look at the costs of associated technology in CMIB as well: In 2015, cost-to-income ratios (CIRs) increased by two percentage points, to 74%, matching 2011 highs. Some of these cost benefits have been be gained by moving to electronic and centralized trading. However, it still costs about five times more to process an interest rate swap than an FX option, even as swaps are being migrated to electronic platforms. Legacy architectures of banks remain complex, weighed down by a series of bolt-on solutions and spaghetti systems. FICC sales and trading IT budgets have nearly doubled since 2012. Moreover, adding to business-unit costs are group costs, such as those for risk and cybersecurity, which increased by approximately 10% during the same period. Group costs are allocated across the businesses, investment banking being no exception, weighing further on CIR. As a result, the overall profit pool for investment banking fell from $68 billion in 2014 to $60 billion in 2015. The downturn was driven by a combination of declining revenues and escalating CIRs, with each percentage point rise in the CIR costing the industry, on average, about $3.7 billion in profit. Of course, CIRs vary dramatically by business line. At one end of the spectrum, the CIR for commodities—which posted a revenue loss in excess of $2 billion in 2015—ranges from 90% to 110%. On the other side, DCM and M&A were among the most lucrative business lines in 2015, posting profits of $10 billion and $7 billion, respectively. Primary markets have some of the lowest CIRs in the industry, strengthening BCGs argument in favour of cooperation based on strengths, allowing Mount Wish to become a strong partner taking over the FICC risk management business while CMIBs focus on their core strengths across corporate and investment banking (CIB).
Additionally, a once hardly talked-about area, transaction banking (as often noted a very scale-driven business), has been termed the "new sexy" in recent times. Before the global financial crisis of 2008, transaction banking had yet to pick up popularity amidst those in the know. Today, it has quietly become the talk of the town. It has gained popularity because of its ability to stay afloat and generate revenue during difficult times. This is supported by increasing transaction revenues. With such high growth potential and significantly better CIRs compared to FICC business for the clear majority of financial institutions a cooperation on a shared customer-basis becomes even more attractive.
Mount Wish is a quasi white knight for corporate banks
With overall competition picking up and increasing FinTech attacks trying to detoriate commercial lending as well as commercial and corporate payment revenues it becomes even more critical to banks to have strong FinTech partners on the digital customer account management side helping to defend the market share in other core segments (payments, lending, advisory, cash management and partially asset management) where many of them are strongly positioned from a regulatory and structural perspective but lacking tech-power. Therefore, partnering with Mount Wish in the RWA heavy and increasingly complex FICC business (winner takes it all market) makes perfect sense since in return highly attractive (internal perspective with regards to ROE) products can be sold using the FinCaT marketplace. Hence, we will take over FICC risk management where we are exceptionally strong offering a best in-class customer-centric solution (the unrivaled and hard to catch up with RiskPool) while coopetitors gain access to the best customer-insight-driven financial services marketplace to attract new revenues in areas where they have a clear competitive advantage. Furthermore, our ERP-System integrated marketplace acts in parts as additional and effective shield against other FinTech competitors who otherwise might pose a serious threat to the respective banks. Not to mention that only our RiskPool solution is granted ERP access as customers usually expect very high returns and overwhelming benefits (not achievable with today’s cash management and transaction banking or trade finance products, etc.) for such generous insights into their highly-protected (real-time) financials.
Cooperation with other fintechs (contrary to a pure withe knight strategy):
Solution = Strength-based cooperation
Very rough overview on cooperation landscape (split into five categories). Further benefits like for example (advanced) barter deals, new market entrance opportunities, fee structures for brokered business and/or RWA mitigation efforts to name just a few can be discussed on an individual basis. So please feel free to contact us.
- More than 60 well-known and carefully selected institutions ranging from local ones to some bulge bracket banks -
Head of Strategic Partnerships
Giulia is happy to help you with any questions or issues concerning Strategic (Sales) Partnerships