Strategic Treasury

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Transaction Banking: Are the Rewards Still Worthwhile? Although it is still considered relatively 'risk-free' and offers access to other higher-value business with large corporate clients, the challenges of remaining in the sector are making some banks begin to question whether the rewards are worth the necessary investment.

Transaction Banking: Are the Rewards Still Worthwhile?

by Didier Vandenhaute, Partner, Corporate Treasury Solutions Group, PwC Belgium

“For the last two years, our bank has listed transaction banking as one of our key priorities on the first page of each quarterly report. It had never been mentioned there before.” This quote by Marc Buitenhek, Global Head of Transaction Services at ING, highlights the increasing attention transaction banking is getting in the boardroom of both larger and smaller banks. Marc Buitenhek was just one of the 37 representatives we consulted to gain insight into what’s really happening in the world of transaction banking as part of a recent survey.

Transaction banking’s time has come

One thing that was made very clear by our research was that the world of transaction banking is in turmoil

The reasons for this upsurge in interest from the higher ranks of management is twofold. Firstly, in the wake of the financial crisis, the value of transaction banking has increased significantly, but secondly, the sector is now under much greater pressure: not only is the evolving regulatory environment exerting a heavy burden, but competition is increasing between key players already active in the sector. And on top of that, new entrants are also trying to muscle in on the action.

But there simply isn’t enough business out there to satisfy everyone vying for a stake. RBS has already pulled out of the industry completely and there are rumours that others may follow, while some players have not deviated from their strategy and continue to invest. “We haven’t hesitated to accelerate our investment and focus on our transaction banking business. If you start to look at the business in a too granular way, your cash management business will gradually die!” notes Jean-François Denis, Head of Payments and Local Offers, BNP Paribas, who also took part in our research.

Consolidation on the road ahead

That may well be true; a large majority – 87% – of the interviewees for the PwC European transaction banking survey 2015 expect there to be consolidation of the transaction banking market in the coming years and there are a number of clear reasons why:

  • Increased competition means lower prices; even when we look at working capital management solutions supported by the banks, prices are coming down as it becomes more of a commodity service.
  • Investment required to maintain the business is significant.
  • Third-party providers are capturing market share.
  • Maintaining a network of bricks & mortar branches is very costly.

How can banks fight the good fight and not just remain active in the sector, but actually increase transaction banking revenues and market share? By doing more than simply selling services. The role of the in-house corporate treasury department has changed and is evolving all the time. Treasurers don’t just need new products to be presented to them, they yearn for a partner who can support them, an advisor that can offer guidance with regards to all aspects of transaction banking operations: tax, legal, regulatory and efficiency. They also expect that partner to be able to provide customised services, attuned to their individual business context, backed up by sound opinion. From our research, it became clear that banks that are competent and comfortable taking on this more advisory role will gain themselves significant advantage: a major plus point in a difficult market.

Introducing the all-round service partner

Fig 1 - Advisory Practice - Regional banks

Of the 15 banks that we consulted, most regional banks (i.e., banks covering the European region for transaction banking services) have heeded that call; 86% report already having an advisory practice in place to help them meet treasurers’ new demands. Explains Rajesh Mehta, EMEA Region Head Treasury & Trade Solutions, Citibank, “The set-up of the advisory group is a major opportunity for us. These people are equipped and trained to talk to chief financial officers (CFOs) about values and solutions. It might not bring direct tangible business in, but it will clearly position us as the core strategic partner to the corporate.”

Fig 2 - Advisory Practice - Multi-domestic bank

However when it comes to multi-domestic banks, it’s an inverted picture, with just 12% having established an advisory practice.

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