What you need to know about business foreign exchange

Banks across Asia are gearing up to fight for regional dominance of one of the most important and quickly growing products - Business Foreign Exchange. Spot FX, Forward FX and FX Options are the most ‘banked away’ products by customers seeking value for money and personalised customer service.

More businesses are choosing to manage their FX exposure with a dedicated FX provider or competitor instead of their primary banker.

This raises the important question of what banks can do to retain customers, improve wallet share and capitalise on an increasingly competitive Business FX market, compelled by expanding volumes and rapid technology innovation.

Average wallet share for FX Options across the region is a mere 58.3 percent, while Forward FX wallet share is even lower. The largest providers of FX Options and Forward FX products are only banking half of the business they are working so hard to secure and will find it increasingly difficult to ward off concerted challenges by ambitious new comers.

East & Partners latest Asia Business Foreign Exchange report details the most important FX customer dynamics across Hong Kong, Singapore, Malaysia and the Philippines. The report reveals important trends that apply to how banks approach both existing and new FX customers.

The Asia Business FX Markets report measures primary and secondary market share together with mind and wallet share across the spectrum of FX products for Asia’s lower corporate and SME segments (annual turnover US$1 – 20 million). Surveying 250 enterprises in each market with a natural industry sector distribution, the report delivers detailed insight into FX product usage and importance.

Global FX trading now averages almost US$5.5 trillion a day according to the Bank for International Settlements (BIS). The Japanese Yen (JPY) has recorded the largest increase in turnover in 2013 with more than 60 percent more activity than last year at the expense of lower Euro (EUR) trading volumes.

Chinese Renminbi (RMB) volumes are also growing rapidly, particularly as restrictions on the currency are set to be lifted much earlier than anticipated.

The RMB has now entered the top ten most traded currencies, rising from a volume ranking outside of the top twenty as recently as three years ago. Asia accounts for nearly 30 percent of GDP worldwide yet in FX turnover terms is still eclipsed by the traditional financial centres of London and New York.

Asia represents less than 8 percent of global FX turnover; however recent trends suggest this figure will increase significantly.

Singapore and Hong Kong continue to vie for the mantle as the largest and most important financial centre in Asia. Singapore accounts for close to six percent of global FX trading volume compared to Hong Kong’s four percent, latest figures from the BIS shows.

Both markets are growing quickly, with some suggesting Singapore’s rise to be the preeminent Asian financial district is predominantly due to its appeal to multinational banks. Others believe Hong Kong offers greater sophistication and established infrastructure.

London remains the centre for FX turnover, representing over 40 percent of trading volume ahead of the US, falling slightly below 20 percent this year.

Spot FX achieves the highest level of product penetration in Asia, with all businesses engaged in cross border payments utilising the product for risk management and other purposes in some capacity. Forward FX and FX Options represent 21.0 and 19.4 percent product penetration respectively, highlighting a disparity between large and small businesses uptake of specialised Business FX products.

Singapore represents just over a third of regional penetration in both Options and Forwards products, followed by Hong Kong, the Philippines and Malaysia.

Customer satisfaction is an important metric for banks attempting to improve sagging wallet share and the smallest providers achieve the highest satisfaction levels. Average customer satisfaction levels for the Philippines are significantly lower than the regional average yet marginally higher than the Philippines.

Both these countries trail Singapore and Hong Kong for overall customer satisfaction.

The burgeoning Business FX market has attracted both local and international attention, reflected by Australian banks such as ANZ making a concerted drive into Asia. As the only Australian bank represented in the survey, ANZ has clearly identified the move by customers to disperse their Business FX wallet across multiple providers, and instead provide a presence for them at home and abroad.

The key for continued market share growth, and an important factor for the incumbent Business FX leaders to consider, is the relatively high wallet share and customer satisfaction ratings ANZ is achieving. CBA, NAB and Westpac are deploying their own Asian expansion strategies with varying degrees of success and it can be stated that ANZ is achieving the most success, particularly in Business FX markets.

A period of sustained FX volatility is expected to be reflected in a stronger uptake of risk management instruments such as FX Options and Forwards – not just for Corporates but also smaller businesses that have not moved beyond Spot FX for their Business FX requirements. This provides excellent opportunities to smaller competitors to gain valuable market share, while also posing a difficult strategy dilemma for Asia’s largest banks not intending to give up their hard fought market share.

Wallet share and satisfaction ratings presented in the next round of East & Partner’s Asia Business Foreign Exchange report will provide a leading indicator of which provider has got a head start on its rivals as the battle for the hearts and minds of Asia’s Business FX customers heats up.