Looking at today’s headlines which cite a seemingly spontaneous global resurgence in inflation, spiralling energy costs, reactive central bank rate hikes and disrupted mortgage markets, one could be forgiven for not associating the current climate with market efficiencies. It seems each day reveals a juddering new record high or record low in some globally significant metric, as buyers and sellers try to make sense of ‘new news’. React. Rebalance. Reinvest.

The truth is that opportunity, growth, and positive outcomes coexist with mispriced assets, under-valued businesses and overlooked economic relationships. One needs a degree of uncertainty and lively markets to deliver steady growth and anticipated investment returns. Boiling markets, dramatic price action and rising volatilities (seen as a crude measure of future uncertainty in price trends or price equilibrium) offer a reprieve from the stagnant, docile markets of the recent past, where margins were crushed under competitive pressures, sustained out of necessity by predictable and commoditized customer servicing.

Surf the wave

It is natural to adopt a ‘duck and cover’ mentality in the face of the current climate. Efficient or not, markets are creatures of habit – cycles of activity are followed by normalization and adaptation to new pricing levels. Inflation cycles are tamed; FX rates return to follow macroeconomic trends, such as GDP and unemployment; a nation’s trading pacts will once again be considered the only big ‘new news’ to digest.

Banks naturally expect to cope with near-term fast markets through diligent application of prudent trading and management decisions. One might enact risk management limit reviews, moderate riskier business models and increase hedging and incremental position rollovers. Draw in the safety nets. Curtail your ambitious investment plans for the moment. Weather the storm.

But looking closer, you should consider surfing the wave.

Looking at the VIX volatility index (a volatility metric of the S&P500 equity index) as a barometer of market epochs, there are two seismic events of the past twenty years: the Liquidity Crisis of 2008 and Covid-19 impact in 2020. In the former, McKinsey observed in a large survey of 600 banks, how the top performing banks naturally outperformed the lowest performing banks by a significant margin over the subsequent ten-year period to 2018.

What is compelling is how an impressive 60% of that relative gain was achieved by the top ten banks in the first 24 months after the crisis struck. Why? Those banks in question were likely better structured for opportunities, had significant annual technology budgets, larger presence in global markets, wider and more varied customer base, and enjoyed economies of scale…plenty of reasons that would quantify the success they enjoyed.

Qualitatively, they were poised to take quick advantage of market turbulence and client demand during the post-crisis normalization period. These banks stepped into thinner markets, wider spreads, and higher trading volumes, adapting to new correlations, pricing levels and customer demand. They leveraged what they were good at, with advantages in automation, scalability and appetite, when markets were frothy and competitors weathered the storm.

The art of the possible

Today’s post-Covid markets are reacting to geo-political stimulus, energy distortions and pent-up systemic tensions that are fuelling current price action. The process of post-crisis normalization is underway; reversion to means in interest rates, inflation, volatilities and indices; the first such retracements in a generation of market traders.

Replicating 2008’s growth is not bound to a closed club of elite banking logos. On the contrary, barriers to entry today need not be onerous for those banks seeking the triad for growth: great client serving, low technical debt and scalable marketplace.

To understand why, one needs to reflect upon essentially two paradigm shifts in how banks operate, execute, and manage for growth: customer expectations and technologies available today.

 First, you will recognize that customer banking needs of the past decade, impacted by different investment and economic management decisions in the liquidity crisis, are not directly comparable to your clients today. The modern era of greater price transparency and new venues for price discovery, ever-greater connectivity in information and how data is valued and used, not to mention your customers’ banking provision options that includes the rise of neo-banks and digital-first competitors, all point to nuances in growth and revenue potential that are unique to our current times.

Secondly, technological trends have fostered open banking, accelerated digitalization of banking services, and created a new expectation of interdependency for fintechs, partners and platforms to support your business and engage your clients. Technology is delivering easier paths to enable business activities, with incremental enhancements for automation and connectivity within a bank’s architecture. Revenue growth is often realized in part through smart automation in targeted client spaces and asset classes, without the historical concerns of costly and lengthy implementation efforts.

One asset class that sees continual transformation from customer demand and relentless electronification, is the FX market: the purest representation of national health and international opinion.

We have seen GBP/USD recently tracing new lows and some Asian central bank foreign reserves recording massive foreign reserve reductions through recent market interventions against the USD.

All the while, as highlighted by HSBC,  57% of corporate CFOs highlighted losses from significant under-hedging of FX movements and the latest BIS triennial survey available (2019) indicates as much as 40% of FX swaps remain traded over the phone.

Be more efficient, even if the markets aren’t

The already highly automated and connected FX space continues to surprise banks and customers alike, potentially hurting the performance of your corporate clients, and for many, it still often requires manual execution. How is your business supporting your customers, whilst growing a stickier customer base, with increased automation in the process? Whatever you do today, you can do better.

Being brilliant at basics, like electronic FX client servicing, should be a potent discussion within your organization today. It is a persistent client-demand product, currently presenting space to differentiate your offerings from your peers, with widening margins that reflect faster markets and greater pricing. As well, an enhanced and active eFX business offers your bank with a familiar venue for growth in the post-Covid normalization window that is happening now.

Automation, margin management, auto-hedging and wider price distribution to clients and bank branches are all available with least disruption through managed service delivery. While the plethora of eFX trading venues expands, it has only added to price transparency and not necessarily liquidity. Bringing your bank to add that liquidity with the right eFX platform, workflow, risk management and straight-through processing warrants serious consideration.

If numbers need to justify doing brilliantly at basics, the BIS survey shows global FX markets have trended upwards in volumes, having expanded more than 600% in twenty years, at $6.6 trillion daily volumes.

How big is your slice of the pie?