Published: September 01, 2018
Treasurers the world over rely on their transaction banks to provide robust services that cater to their daily financial needs – but the space has long been seen as somewhat ‘vanilla’. Now, however, technological developments and solution-driven innovations are starting to push traditional boundaries. In this Executive Interview, Daniel Verbruggen, BNY Mellon’s Head of Relationship Management Europe, Treasury Services, reveals his vision for the future of transaction banking and explains the potential benefits for corporate treasurers.
In terms of technological innovation, the global financial industry, including the non-bank sector, has historically been a little behind the curve compared to other sectors. The automotive industry, for example, has been using robotics for several decades, and yet, in banking we are only now starting to embrace the possibilities that such technologies offer, by adopting robotic process automation (RPA).
This in part is due to the transformation of the financial sector which resulted in large part from the global financial crisis of 2008/9. As a result, the industry has become much more focused on metrics such as Return on Equity (ROE). Digital transformation projects have also risen up the agenda as banks invest in technology to drive efficiencies, manage evolving risks and market expectations – including new regulations – and benefit from growth opportunities such as big data.
Furthermore, the globalisation and democratisation of technology have given rise to the fintech phenomenon. This new breed of partners can now nourish the industry with innovative solutions, as they are already doing in the retail banking space. We see great opportunities for similar innovation in the transaction banking sphere too, and positive change is under way.
Top of my list of benefits would be potential cost savings. Paper-based processing creates a repetitive, non-standardised approach; technology can help address that. The emergence of mainstream cloud adoption is also enabling users to substantially reduce their IT costs. Moreover, the right technology, combined with an enhanced customer experience, can offer all stakeholders increased speed, efficiency and transparency.
The move towards digital processes has also put the focus firmly onto security. One could argue that paper-based processing has an advantage over digital in this context because digitisation clearly exposes documentation to a wider ‘audience’. But then paper is only as secure as the processes that underpin it. Of course, the same principle applies to digital, but in an era of rising cybercrime and increased regulation around the protection of data, banks are continually scrutinising, testing and reinforcing their electronic platforms and processes. Can the same be said of paper flows? I doubt it.
There is a tendency to view AI through a ‘science fiction’ lens – but this is a world away from the reality seen in the financial services context. We have only just seen the beginning of what AI can and could do within banking. Today, it can be leveraged to automate repetitive, low-value tasks, and is often used in a retail banking context. For example, basic customer queries can be handled without the need for human intervention because data made available to, and accessible by, AI technology, can deliver a structured, albeit ‘emotionless’, response. Think about online chat-bots and voice recognition software interpreting an enquiry using simple keywords, for example.
Bank employees, such as frontline teams, can also use AI to improve their own research and the speed with which they can respond to more in-depth customer enquiries. Imagine trying to determine the 50 best-performing funds from a global universe in order to advise a client about the current fund landscape, for instance. Leveraging AI, a relationship manager can be furnished with a response from a rapid background search across multiple data sources in a matter of minutes; certainly quicker than any human could manage.
Corporate banking enquiries will be more complex, however. This is due to the nature of corporate business models - with multiple entities, banks, accounts, currencies and so on. Automatic handling of these types of enquiries will require more sophisticated AI, which is yet to be created – or at least deployed – in this context.
As such, the conversation transaction banks are currently having around AI is more about handling big data and how digitisation and standardisation are creating platforms to deliver cost and process efficiencies for both banks and clients. That said, the future of AI within transaction banking looks bright, especially its application as an intelligent advisory tool, where it could, for example, build complex plans for customers based on multiple data sources, and this independently through machine-learning.
A company wanting to export to another market could, for instance, be provided not only with information pertaining to trade finance products suitable for the country in which it intends to do business, but also with detail about different export routes and physical and financial supply chain options. Machine-learning could tailor the experience to the corporate’s needs, without any human intervention.
This is just one example of how AI could be deployed within the corporate world, but it demonstrates that AI has the potential to positively impact the value chain, linking service providers, banks and corporates in an automated and more integrated way. Moreover, human interaction will become more prized, and more valuable, with front line teams freed up to deliver genuine insight and expertise.
Honestly, I’m not sure that the term ‘AI’ is well-understood. People do not necessarily classify AI solutions as such. The influence of Hollywood movies lingers on! The reality is that there is a spectrum of automation, from RPA to machine-learning to ‘true’ AI where machines learn and make decisions autonomously. What we know today in banking is just the tip of the iceberg.
As we discussed, the ideal scenario is to be able to apply this technology to complex functions but today banks are still spending a lot of their funding just on keeping the lights on. What’s more, as banks, we still rely too heavily on our own developments. There is not enough sharing in this industry and, despite the push for ‘open banking’, we still largely operate in silos.
For AI to flourish, greater collaboration is needed – but a high level of confidentiality rightly persists in banking. Also, until now, some smaller banks have been reluctant to co-create solutions, waiting to follow the lead of the big banks instead. There is light at the end of the tunnel, though, since the democratisation of technology and the rise of the fintech which will change the status quo.
Although they have been around for a long time, application programming interfaces (APIs) are now being commercialised, especially as new technologies and more co-operative attitudes align. In transaction banking, APIs and open architectures will ease the sharing of different data sources and taxonomies with selected counterparties, promoting greater integration between customers, third-party banks, infrastructure providers and regulatory authorities.
Of course, blockchain – or distributed ledger technology (DLT) – is receiving a lot of attention too. It’s highly applicable to manual, paper-based processes, and is gaining significant traction in the world of trade finance therefore. Payments are perhaps less of an area of innovation for DLT, since we are already moving much closer to achieving secure real-time settlement. However, there may be scope in this context for DLT as a security and back-up tool.
Elsewhere, the ‘utility settlement coin’ programme, which now has six global banks on-board, is an asset-backed form of digital cash that we hope will ease clearing and settling transactions. It will allow banks to pay for or buy securities from each other using blockchain-secured digital ‘coins’. These are directly convertible at central banks, being supported by deposited collateral. With no need for a liquidity check, it will save time, cost and of course the capital needed for post-trade settlement and clearing.
At the moment, real-time global payment execution is still a little way off – but great progress is being made nationally and regionally. Furthermore, gpi brings benefits for corporates that go beyond speed, such as greater transparency and the ability to track transactions. For the first time, gpi also allows corporates to monitor the underlying charges behind their payments.
This marks a fundamental shift from the past, where the bank and corporate worlds operated strict Chinese walls. Now, gpi is opening up that underlying bank data to the corporates – it is up to them to leverage it. Thus far, relatively few corporates have taken advantage of this capability or approached their banks about it. I would recommend that they at least have that conversation with their banking partners because there is room for manoeuvre in terms and conditions.
Delivering progress remains a challenge. Banks have invested in their own digital development, whilst shoring up their balance sheets and attending to other compliance needs. Risk management is a permanent fixture on the radar too, especially around cybercrime. Naturally, the investment required in these day-to-day essentials impacts the rate at which banks can embrace technology. Banks cannot cut corners, either: they must be able to provide an uninterrupted service that is also secure – and demands a huge ongoing investment.
Hopefully, greater collaboration with fintechs will assist in accelerating the pace of change. We are seeing more and more proof-of-concepts emerging as the fintechs realise that they need the experience, knowledge and gravitas of a banking partner to make any serious progress. Equally, the banks understand that they can benefit hugely from working with developers far more agile than they could ever hope to be. So, this is certainly a space to watch – and one that corporates can influence too by getting involved in pilots and giving banks honest feedback about their tech expectations.
In the short term, I imagine that there will be more of the same - APIs, automation, and the digitisation of data - but we need to leverage these technologies more deeply. Banks need to change their business models as they embrace technology too, becoming more like trusted advisors, using tech to deliver much more than simply a product. Big data will assist here, as banks find better ways to mine the data they hold for insights into customer behaviours. On the back of this data, banks should be able to marry up their solution sets more closely with customer pain points. With this in mind, I believe that we will see closer co-operation between banks and data aggregators such as major online retailers and mainstream technology firms.
I believe that we will also see more banks educating corporate clients around the potential benefits of technology, as some applications are not always immediately obvious. Simply creating an awareness is not enough; we need to take a more holistic approach, one that touches all parts of the client’s business, including the extent to which they are leveraging their existing in-house systems. After all, many modern ERPs are capable of much more than some companies realise.
In summary, although transaction banking technologies are still evolving, treasurers cannot afford to sit and wait for the benefits to be delivered. So, the next step is simple: talk to your bank about the future of technology – and keep an open mind.
The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.
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