Published: October 10, 2014
Transaction banking products have always been at the core of the relationship between corporates and banks. The role of financial institutions in supporting corporates has traditionally been centred on providing products and services that facilitate the transactional flow between the corporate and its clients and suppliers, as well as providing the appropriate credit facilities to cover short-term financing needs and longer-term investments. The recent and long financial crisis in several large economies, still to be fully overcome, has put significant pressure on the lending capabilities of banks and, by contrast, has made evident the need to reinforce their value proposition to corporates in the transaction banking space, across the spectrum from payment services, in particular cross-border to liquidity management, working capital tools, and supply chain finance.
A state of the art transaction banking offering generates a ‘win-win’ situation for banks and corporates. By excelling in transaction banking, banks earn significant revenues (~25% of global banking revenues, with retail and wholesale payments related revenues expected to reach $2tr in 2023) and benefit from annuity-stream fee revenues, low risk and capital requirements, and high returns on equity of these businesses. Corporates win when banks efficiently support their core processes such as ordering, invoicing, accounting and working capital management. To further the win-win, corporations need banks to keep up with and adapt their offerings to the trends that impact their transaction banking and treasury needs. We see five trends altering the nature of transaction banking and hence meriting the attention of corporate treasurers and their bankers.
While Europe is still the largest ‘inbound’ transaction banking market, rapidly developing economies will grow significantly faster during the next decade. This strong growth will be driven by a significant increase of international trade flows, especially with and within Asia, with rapidly developing economies contributing ~ 55% of expected transaction growth. In addition, mid-market and SME clients in mature economies are increasingly transacting cross-border as they seek growth opportunities abroad. Banks will need to respond by developing increasingly advanced international capabilities.
The digital wave is changing dramatically how businesses engage with their customers and how they run their business. As they improve their own customer engagement and service levels, their expectations of the digital capabilities of their banks steadily rise. While global banks have been investing heavily in transactional platforms that were initially aimed at large caps, most players are now increasingly downstreaming these capabilities to mid cap clients. Best-practice banks have made digital an integral part of their business across segments and have transformed every aspect of the client experience – including relationship management, channels, products, risk appetite, pricing and customer service. Importantly, they have leveraged digital channels to improve the operations of their clients and have thereby become embedded in their clients’ core processes.
A new set of regulations issued mainly in Europe and the US in the last five years (Basel III, SEPA, Payment Services Directive; and tighter requirements re Know Your Client and Anti-Money Laundering) are and will continue to severely impact the global transaction banking landscape. Stricter KYC and AML legislation has led to increasing compliance costs and litigation risk for banks. These in turn can have adverse consequences for bank-corporate relationships: e.g., protracted account opening processes, payment value limits, difficulties for banks in supporting corporate international business in less secure jurisdictions. Regulations, however, can strengthen the bank-corporate relationship in cases where banks develop expertise in compliance and can act as advisors to their corporate clients (e.g., SEPA implementation). Finally, the liquidity rules of Basel III – by making operating balances relatively attractive to banks – are already heightening competition for these balances, which in turn translates into more attention to and investment in transaction banking services.[[[PAGE]]]
The treasurer’s role is becoming more strategic with increasing responsibility for working-capital optimisation and hence increasing interaction with procurement, sales and accounts receivables. Along the financial supply chain, there are still numerous pain points (such as dispute resolution, account reconciliation and trade credit) and vast numbers of manual and paper-based processes that could be automated – thus releasing large amounts of working capital. By investing in services that automate the entire financial supply chain, banks can win a greater share of wallet as well as gain greater visibility into their clients’ cash flows. This represents a unique opportunity for banks to differentiate themselves and make working-capital optimisation a key part of their efforts to win cash management business.
As corporate treasurers are demanding more support along both the financial and physical supply chains, new entrants are striving to fulfil these demands and some are threatening to disintermediate banks. New entrants like Tungsten, Intuit, Traxpay, Earthport or Aribapay aim to address existing pain points by providing, for example, real-time, rich remittance information, lower fees and launching innovative offerings to enable seamless integration of payments and ERP and accounting-software. However, best-practice banks are in the position of being able to deliver a virtuous circle that is hard to match for nonbank players. Higher visibility of clients’ cash-flows enables the bank to determine credit needs, offer optimal credit products, and possibly improve pricing. If the bank can improve the client’s working capital, the result could be better analyst ratings and a higher stock price for the corporate.
Corporations face an increasingly complex business world and regulatory landscape. The trends outlined above are significantly changing their transaction banking needs. Banks must track and understand these trends and adapt their transaction banking offerings in order to remain relevant business partners. Leading banks are going far beyond delivering ‘products’ to providing ‘solutions’ (e.g., working capital optimisation, supply chain financing) and advice to its corporate clients in order to truly generate a win-win relationship [1].
[1] If you want to read more about The Boston Consulting Group perspectives on Transactional Banking, please visit www.bcgperspectives.com, where you will find the latest editions of our annual Global Payments Report; this year’s edition Global Payments 2014: Navigating the Next Level will be available in October. This fall will also mark the debut of BCG’s Global Payments Model Interactive, freely accessible, which explores how regions and segments of the payments market will shift from 2013 through 2023.
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