Lloyds Banking Group: Achieve true global reach – Kevin Stockbridge and Paul Taylor
Despite the challenges of the financial crisis, correspondent banking remains an attractive prospect that allows banks toconduct business in new locations and jurisdictions withoutextending their branch network. Kevin Stockbridge and Paul Taylor of Lloyds Banking Group explain how the company has developed a firm foothold in global markets.
With the world growing ever more connected, the goal for many domestic banks is to increase their global reach.
Simply expanding their networks, however, is not always a tenable strategy. While this does fulfil the aim of enhanced coverage, opening branches in new locations can prove prohibitively expensive. Different markets pose different challenges and it can be hard to amass the resources necessary to maintain expertise across the board.
Many banks are thus taking the alternative tack of correspondent banking - partnering with other financial institutions overseas. By matching international scope with local knowledge, a bank can extend its footprint dramatically, driving economies of scale across the entire value chain.
"The first reason we're in correspondent banking is to serve our clients," says Paul Taylor, director, global clients at Lloyds Banking Group. "We want to gain a comparative advantage in certain currencies and countries where we don't maintain a physical presence."
As the largest retail bank in the UK, Lloyds is domestically focused first and foremost. Servicing its customers outside of the UK has long been a matter of teaming up with partners in the appropriate countries, and this commitment is being carried forward in the form of a major investment from the CEO.
Originally Lloyds TSB Group, the bank was renamed Lloyds Banking Group in January 2009 following the acquisition of HBOS. With a diverse array of business activities and an extensive customer base, the group offers services domestically via the UK's largest branch network, as well as internationally through trusted clients.
Its larger size has brought a new and more extensive range of capabilities, including an innovative strategy for correspondent banking. Top of the agenda has been streamlining the list of partners with which it transacts.
"The events of the past three to five years have caused us to focus on how many correspondents we can meaningfully serve," says Taylor. "We must always select the best providers in particular countries, which, in times of crisis, means the most creditworthy as well as those
with the best relationship and product capability. We successfully managed to right-size the portfolio last year."
Although it did not exit any countries, Lloyds shifted its attention towards the strongest institutions in its portfolio. In part, this was a straightforward matter of retaining as much payment traffic as possible and identifying names that fitted the new products being introduced.
"We have found ourselves focusing over time on regional or global players because the overheads of maintaining relationships are much lower," declares Kevin Stockbridge, Lloyds' director of payments and cash management.
"This was particularly the case in high-risk countries, where local partners are not always well positioned to deal with market ebbs."
The most salient aspect of any bank-to-bank relationship, however, is the extent to which it benefits both sides. Reciprocity is key. A successful arrangement allows each bank to capitalise on the other's strengths, buying services it lacks in-house and selling the same in return.
With an emphasis on collaboration, Lloyds' chosen partners boast an in-depth knowledge of their home markets, bringing expertise in areas that would otherwise be beyond the remit of a UK-based bank. Lloyds, meanwhile, offers industry-leading know-how across sterling payments services and secure, resilient core processing. Its aim is to help clients develop solutions that benefit their customers and bottom line alike.
"We've tried to make our coverage model appropriate by identifying the banks that need an intensive coverage against those that require a responsive, proactive and 'optimal' service level that does not typically involve daily or weekly dialogue," says Taylor. "So, as well as distinguishing our markets by geography, we're splitting them by the complexity of the relationships. We're not trying to deliver every kind of product to every kind of client."
Rather, the approach is nuanced, with services carefully tailored towards the client in question. Whereas many banks have lately focused on consolidating their product offerings and removing anything overly niche, Lloyds has enhanced its range. Having significantly boosted capability in several product areas, it is better equipped to deal with the variation in clients' needs.
"Some of the trading areas and products, such as securitisation and debt capital markets, are an integral part of the way we manage bank relationships nowadays, whereas ten to 15 years ago they simply were not," explains Taylor.
This is not to say that Lloyds is in any danger of venturing into the realm of the esoteric. Throughout the turbulence of recent times, conventional products have generally been the ones to suffer the least damage.
"This was one of the constants in the crisis," says Taylor. "We could rely on the revenues and flows of traditional correspondent banking payments and trade. Some of the pipeline from the more esoteric products
may have been affected a little bit more than the traditional annuity flows, which have proven to be core to the majority of relationships."
Transactional services are therefore one of the bedrocks of correspondent banking, with another promising area being foreign exchange (FX) and trading. Since income from fees plummeted, the importance of trading flows and revenues has proportionally played an ever greater role in boosting business.
Change for the better
Of course, as economic and regulatory factors continue to shift, correspondent banking is unlikely to remain the same. New initiatives, such as SEPA, have rendered the role of correspondent banking in flux and traditional means of making money from payment processing have been placed under considerable strain.
Nonetheless, while the current regulatory landscape is certainly challenging, it may equally be construed as an opportunity. The task is to adapt correspondent banking to this evolving climate, finding innovative ways to manage relationships and thus reduce risk. To this end, clients need a partner that is both highly attuned to market trends and capable of maintaining appropriate levels of security.
This entails staying abreast of new legislative requirements. In terms of SEPA, for example, Lloyds supports all the necessary payment instruments and formatting requirements. "Compliance with new regulations is at the heart of many IT developments in the payments sector," states Stockbridge. "Therefore, the principal aim of our new investment programme is to focus more closely on our clients' needs."
A firm people focus
Moreover, despite the fluctuations of the industry, Lloyds never deviates from its intensely service-focused approach. Having been in this business for over 30 years, it takes a highly people-intensive view of the market.
"We don't necessarily have the most straight-through systems, but what we do maintain is our people's expertise and a commitment to put our customers first," says Taylor. "When you're talking about exchanging payments with banks in 90 countries, there will inevitably be the occasional issue, and the way you service your clients is crucial."
Ultimately, this comes down to a question of trust and accountability: clients trust Lloyds to take responsibility and deliver high levels of client satisfaction. "We don't have a call centre mentality," stresses Stockbridge. "We work on the basis that clients have key contacts and should know who to call - as opposed to just joining a queue. Service is one of our key differentiators. This is something we hear on a regular basis from clients - we are extremely strong in this regard."