The Opportunity in Transaction Banking
Transaction Banking, which encompasses, cash management, trade finance, financial supply chain management and clearing/settlement services is drawing renewed attention and investment throughout the banking industry globally. The increased focus is driven by the significant size and growth potential of the region’s transaction-banking revenue pool. The Transaction Banking revenue pool is huge – nearly US$600bn globally in 2010, growing at about 10% per year through 2020. Boston Consulting Group (BCG) estimates the transaction banking revenue pool to reach nearly US$1.6 trillion by 2020. Due to the growth in emerging markets, developing countries will see a relatively higher transaction banking annual revenue growth over the next decade.
All available evidence suggests that transaction banking delivers excellent financial performance. As per Standard Chartered Bank research, transaction banking delivers a return on risk-weighted assets (RoRWA) of more than twice the corporate banking average. Similarly, it is clear from a McKinsey report that transaction banking not only provides greater returns on risk-weighted assets, but also deepens client relationships.
The Challenges: What’s preventing the Banks from tapping the Opportunity?
Although there is a huge opportunity for banks globally in Transaction Banking, there are a lot of challenges as well. To capture the opportunities in transaction banking, banks must adapt to the changing customer needs and preferences, comply with a myriad of legal and regulatory requirements while managing the pressures on cost and margins.
One of the main drivers for growth in Transaction Banking revenue pools is the growth in SME economy in emerging markets. SME companies in emerging markets are growing rapidly and expanding in the overseas markets. SME growth is also forcing structural changes in economic hot spots throughout the globe such as Intra-Asian trade, South-South cooperation, new trade corridors Asia – Latin America, China – Africa, India - Africa, amongst others.
Domestic banks which traditionally had banking relationships with SME customers are following them overseas and becoming regional or global banks.
As SME companies are growing bigger their transaction banking needs too are evolving to become more sophisticated and they now look for best of the breed solutions from their banks. A McKinsey survey of more than 125 large and 200 mid-size Asian companies reveals that, on average, large corporations use more than 30 banks. On the other hand companies in the developed countries face a different challenge than fast growing SME companies in emerging countries. The financial climate in the developed economies, particularly Europe, has made bank borrowing untenable and companies are now looking to free internal trapped cash to fund their working capital requirements. In a nut shell, CFOs globally expect their banking partner to integrate their physical supply chain and financial supply chain and provide end-to-end working capital management solution. CFOs demand real time information, real time reconciliation, transaction banking products and services to unlock their trapped cash and optimise working capital needs.
Domestic banks in emerging markets are being forced to significantly improve their transaction banking capabilities in order to capture the opportunities in transaction banking business and compete with large specialists for the business. On the other hand, it is very clear from the Greenwich Associates report that the global financial crisis forced many European banks that had traditionally been leaders in emerging markets particularly in APAC to pull back from the region. While most of the European banks are coming back to emerging countries, there is a need to renovate update/transform their transaction banking platform in order to comply with the stringent regulatory and capital requirements while keeping pressures of costs and margins under control.
Regulation is a major challenge for the financial services industry and its customers. Since the global financial crises, there has been an unprecedented amount of new and complex regulations. Transaction banking and cross-border business is under increasing regulatory scrutiny. Regulatory pressures may originate at the supra-national level, from institutions like the Basel Committee of the BIS, as well as at the national and sub-national levels. Increasingly regulations are no longer contained by borders, as legal and regulatory requirements from one jurisdiction are increasingly being applied outside of that territory. European Market Infrastructure Regulation (EMIR) and Foreign Account Tax Compliance Act (FATCA) too impact operations in markets on the other side of the world.
Whether it’s a domestic/regional/global bank; Banks need to adhere to them to implement and demonstrate compliance on a variety of levels: from capital adequacy to anti-money laundering; from anti-terrorism to the due diligence measures covered in the ‘Know Your Customer’ (KYC) and ‘Know Your Customer’s Customer’ (KYCC) rules.
Local Passion, Global Presence: A new operating model that Banks need to adopt
Banks need to transform and significantly improve their capabilities in order to tap into the growth of transaction banking while addressing the complex needs and expectations of their customers, compliance with web of regulations (supra-national, national and sub national levels) and managing the pressure of costs and margins. Regional and Global banks have additional challenges such as operations in diverse markets, operating in multiple brands, multiple solutions, lack of standardisation, intense pressure from competition, need to deliver new products, faster time to market, client attrition, and many others. Considering the challenges and the diverse global markets the banks operate in, an all-inclusive approach has little chance of delivering the right results. Banks need to fundamentally transform their business and operating models, capital structure and risk management approach in order to tap into new opportunities in transaction banking.
What’s needed from a Transaction Banking Platform to enable this change?
Customers demand personalised products and services, consistent and standard levels of service from across the banking group cornering banks to transform their business and operating models. New age transaction banking platforms should provide banks with the capability and flexibility to act local and think global. “Local Passion, Global Presence”.
New age transaction banking solutions should be designed for regional or global deployments enabling banks to centralise their operations with the capability of providing virtual processing environments to delink the location of technical infrastructure, Bank’s operational and processing teams/experts and end-customers. This will enable banks to move the workload giving greater leverage over resources. Specialist offshore and regional processing centres can be brought in to cut costs and boost productivity, while the high value advisory banking services work remains local.
New age transaction banking platforms will enable banks to adopt a Unified business and operating models across all of its branches (domestic and international) based on best practices. Process standardization and best practice will enable banks to manage cost and margin pressure along with the capability to deliver consistent services to their customers. New unified business and operating model will also empower banks to provide local products and services while having the capability to comply with all of the supra-national, national and sub national regulations.
Centralisation, global deployment and unified standard operating and business model can provide banks with the capability of extended hours and follow the sun processing, higher throughput rates, while improving the flexibility to add volume quickly and grow market share (e.g. through in-sourcing).
The author is Vice President and Head - Global Solutions Sales & Transaction Banking, Nucleus Software