Segmenting your client franchise for profit

Ludovic Blanquet, chief product and strategic planning officer at smartTrade, investigates the complex dynamics of profitable e‑FX franchises, the importance of building and consolidating client trust, and how a technology partner such as smartTrade can offer the agility to aid this

For the past few years, banking institutions – particularly European ones – have been under pressure to reduce cost-income ratios. 

A year and a half ago, at the start of the Covid‑19 pandemic, many banks were still shifting from the universal banking model to a more niche market approach by focusing on flow. As uncertainties have become part of a new normal daily life over the past 18 months, banks that were already well advanced in digitising their client relationships found themselves enjoying a competitive edge. 

Recognising opportunities and obstacles can be a challenge for any firm – especially for a regulated institution that has been part of the economic landscape for many years. However, most financial institutions have now realised that their longevity has given them a unique advantage in the form of a large, diverse, trusting client base. 

But no two clients are the same, and their expectations and demands are constantly evolving. Delivering exceptional service to such a diverse universe requires not only the right segmentation tools but also an intimate understanding of trading behaviours. This must be supported by an end-to-end integrated and flexible technology stack. 

Understanding the needs of different client segments

smartTrade reviews the various client segments and their requirements before turning its attention to the technological components necessary for the successful running of an e‑FX trading franchise.

When considering e‑FX franchise profitability, all eyes turn to corporates – but companies trading FX come in many different shapes and sizes. Local small and medium-sized enterprises (SMEs) that only trade occasionally can be folded into a bank’s retail business, whereas regional SMEs require advice and regular trading services. 

Despite their lack of trading sophistication, these clients are very profitable and will soon defect to fintech alternatives if a focus is not put on user experience and if trading isn’t embedded into the wider bank mobile or browser-based application. Some markets capitalising on open banking are taking things a step further by integrating FX trading directly into these clients’ accounting/treasury management system (TMS) solutions. The key to success with this segment is convenience.

At the other end of the corporate spectrum, regional and global multinationals will be tempted to interact with their banks through multi-dealer portals, which represent a significant expense for an e‑FX franchise. To attract these clients back to their single-dealer platform, banks need to offer advanced workflow – supported by the appropriate credit and risk models – such as flexi-forward, extension, fixings, single-spot portfolios and take-ups. Although these workflows have been steadily growing in volume since the start of the Covid-19 pandemic, they still represent a small proportion of transactions overall. We are observing that banks offering such transaction types benefit from higher levels of repeat business and overall flows from these corporate clients.

Even more demanding are institutional clients, such as buy-side and non-bank financial institutions. These organisations have typically been investing heavily in technology to better integrate with banks’ trading desks. FX – once an afterthought for such organisations – has now emerged as an asset class in its own right as greater attention is given to the achieved rates post-trade.

Today, many of these clients require Financial Information eXchange protocol – or FIX – integration, algo trading, efficient request for quote and aggressive streamed rates. Banks need to respond by better handling the segment’s pre- and post-trade specific requirements around allocations and confirmations, combined with advanced trading strategies and algos. 

The role of technology

Segmenting the client base is central to the success of any e‑FX franchise. Of equal importance is the use of tools to dynamically monitor the trading behaviours of clients. The analytics produced by these tools give banks’ relationship and portfolio managers the information needed to tailor the type of transactions, instruments, credit and, ultimately, price clients can get from their bank. 

The requirements of all client segments are continuously evolving as firms face renewed market volatility and sustained uncertainties in their business. These factors in turn require agility and responsiveness from their banks. 

Banks can no longer afford long cycle developments if they want to remain at the top of the lists of their clients’ trading partners. Technology is playing an increasingly crucial role in supporting banks’ e‑FX franchise ambitions. 

Besides the dealer-to-dealer stack, the key technological components required to serve clients are a trading and position book, client pricing, credit checking, a workflow orchestrator and order management, algos and analytics components.

Combining electronic and voice trading in a single order management system is not only an obvious way to simplify a technology stack and decrease overall cost of ownership, but a clear response to the important demand from clients for voice trading. 

The cornerstone of a successful client-centred e‑FX solution is the workflow orchestrator. It needs to be open enough through an application programming interface for a bank to plug in its pricing, business logic and existing system to tailor workflows to each client segment. Ideally, it will require little to no coding, encompassing the user interface rendering and its underlying step flows. Armed with such a tool, banks’ e‑FX product management teams can differentiate client journeys by segment. This is an essential driver of value. 

Client algos: a key differentiator

The contribution of every individual technology component to the design of a profitable e‑FX franchise is too expansive a topic to explain concisely here. A key element, however, is the client algo. Although algos have been in existence and used by traders for some time, their deployment by clients is relatively recent. We see them as the means for banks to offer very advanced tailored solutions to certain client segments. Two examples of this are: 

• Algos plugged into the corporate TMS to extract cashflow forecast and automatically hedge risk exposure 
• Automatic extracting the enterprise resource planning payroll forecast to reduce the monthly FX – and associated payment costs – exposure.

Agility is crucial

Banks recognise they need to select and implement a reliable end-to-end open technology stack that is not only scalable but functionally rich, with a proven track record of enhancing and simplifying the e-FX franchise business. That alone is not sufficient – they need a partner agile enough to respond to their clients’ challenges.

By choosing a technology partner such as smartTrade, which understands the complex dynamics at play behind a profitable e‑FX franchise, banks can focus on retained business and on cultivating their most precious and hard-earned asset: client trust. 

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