Global Transaction Banking (GTB) has gained significant momentum in the last five years and is becoming increasingly important for banks as corporates continue to expand their businesses across the globe. Last year, 2014, could be described as the transition year for transaction banking, seeing the recovery from the financial crisis and the promise of a strong future growth. 2014 also saw a convergence of many regulations, including Basel III, the Foreign Account Tax Compliance Act and the Dodd-Frank Act, which all impact this area.
Transaction banking revenue pools have been growing rapidly year-on-year for the last five years. Boston Consulting Group (BCG) expects both volume and value of transactions to increase by about 9% per year reaching about 750 billion transactions valued at $782 trillion by 2020. To cope with this momentum and reap the full benefits, banks are rationalizing their business models and transforming their strategies. Below are some of the key changes which are taking place in the transaction banking space right now. A few banks have already initiated these changes but many are waiting to follow.
- Restructuring: The days of having separate business units responsible for cash management, payments and trade finance in banks are over. Banks are rationalizing their business models based on the needs of their clients, providing integrated solutions through enhanced delivery capabilities and closer collaboration with the rest of the bank.
- Concentration of business: Now banks are becoming smarter about where they focus their energies. The cost of capital is forcing banks to be more focused on their strengths. For example, if the cost of regulatory compliance is high in a specific country then banks could be selective about where in world they will do the business.
- Focus on business solution not on product: In the past, banks became too focused on the individual products and how to price them, losing sight of the real needs of corporations. Today, corporations demand comprehensive working capital management solutions at every stage of the transaction life-cycle to optimize costs, increase automation and improve efficiency. In order to achieve this, banks are focusing on portals to offer corporate customers not only a single entry point to access all of their account data, services, and payment information but also a complete, 360-degree view of their finances.
- Greater analytics: Analytic tools are currently underutilized by banks due to silo-ed systems and data housed in multiple warehouses. Dynamic analytic capabilities are very important for customers but not many banks have gone beyond providing corporations with basic management information. Providing insights of the customers’ business benchmarked against the industry and proactive measures for faster decisions, banks want to position themselves as strategic advisors rather than mere “Banking Partners”. Hence, most banks recognize the importance of analytics, but genuine capability in this area is two to three years out on most banks’ roadmaps because they need to integrate their solutions and consolidate data before they benefit from the analytics.
There is no doubt that transaction banking is a rising star of financial services. Globally, transaction banking forms 35% of corporate banking revenues. It also provides higher return on risk-weighted assets (RWA) i.e. nearly twice that of the rest of the bank’s operations. So, it is imperative for progressive banks to offer transaction banking services. However, increasingly the customers are becoming very demanding and want most of the activities to be done by the bank. This has put banks under lot of pressure, a) to develop solution delivering capabilities, b) to coordinate within their organizations and even with partners to deliver a comprehensive tailor-made solution. The upside is that tighter the integration of the banks’ services the greater the customer retention or ‘stickiness’ and the more opportunity there is to up-sell and cross-sell.
Today banks have to look beyond their traditional horizons and provide unified platforms with integrated services providing processes and transaction facilities. Future success will require a change in the mindset of banks—siloes must be broken down, focusing on strengths and providing end-to-end solutions along with significantly enhanced analytics capabilities. Those willing to transform themselves and their strategies in the ways described here can expect to reap the benefits of this growth.
Nucleus Software is a leading provider of transaction banking solutions, which are used by some of the largest global and regional banks in the world. To find out more about our next-generation software product, FinnAxia, see here.