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

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.”

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

Standing up to scrutiny

One clear indication of the current state of the transaction banking business was the readiness of the experts we spoke with to list the multiple threats they face; the most notable of which is regulation, PSD2 and Basel III in particular. As regulators look for even greater transparency, banks are coming under greater scrutiny. And, as in many industries, regulators are becoming more and more stringent. The cost of compliance is substantial. Not only do banks need to make sure that their own operations are fully in line with applicable legislation, but those of their customers and entities even further down the line too. Knowing not just your customers, but your customers’ customers is hard to sustain.

But that’s just one part of the problem; regulation also opens up the market to new entrants that aren’t subject to the same strict legislation. Players looking to enter the market often don’t need a banking licence and aren’t bound by the same regulatory framework. They also tend to have greater flexibility, be more innovative and are better able to handle and process data as they’re not encumbered by legacy technologies. This puts them in a much more favourable position to develop and offer the sorts of customised solutions companies are looking for.

While for the time being new entrants are simply cherry picking the parts of the business they want, they’re still taking business away from incumbents.

Greater regulation isn’t all bad news

Perhaps surprisingly, regulation is also seen by some banks (58% of interviews surveyed) as one of the biggest opportunities for the sector. Banks are able to access data from competitors just like any other payment service providers, so why don’t they? This data could offer a valuable source of information for the creation of new and innovative products and services. Even within their own environment, banks have a tremendous amount of data already available to them. Use it well and that data could be a valuable asset in helping them differentiate themselves in the market. Despite this, just five banks interviewed say they have a solution in place to effectively manage the data they collect for wholesale corporate banking.

One thing is clear, inaction is not an option. In the words of Shahrokh Moinian, chairman of the Corporate Cash Management Council, GTB, Deutsche Bank, “It’s a world that’s moving very fast. If we stand still, we will die!”

At what price liquidity?

While it seems that banks don’t want to lose clients’ core business in terms of cash management, they’re less keen on excess liquidity, especially as the true cost value of liquidity is getting harder to compute. Legislative developments again play a role in this new cautious approach as they mean that the inherent cost of maintaining corporate liquidity in a bank’s books can now be much higher. US banks seem less wary than their European counterparts. Having had to be ready for the impact of liquidity coverage ratio (LCR) earlier, they tend to be ahead of the game. They’ve had time to fully analyse the effect of the regulation and calculate the true cost of liquidity. “We have a competitive advantage as we have applied and understood the real impact as from January 2015,” says Suzanne Janse van Rensburg, Head of Liquidity GTS EMEA, Bank of America Merrill Lynch.

Some European banks, however, seem still to be struggling to get to grips with the full bearing of LCR in terms of liquidity costs on a client by client basis. If they want to improve management of short-term liquidity, they need to talk to clients about when they will deposit cash, how much and in which currency, and for how long. When they have a better understanding of the true cost of LCR, they’ll be much better placed to provide more valuable solutions to their clients.

What makes a top European bank?

  Click image to enlarge 

In banks’ own opinion, those that will win cash management business going forward will be the ones that not only develop and offer those solutions and services, but have the geographic coverage to support the clients they serve in the way they expect. This demand for strong geographic coverage demonstrates how many banks still think along traditional lines. But it will take new thinking and approaches to be able to serve clients in truly innovative ways.

One thing that was made very clear by our research was that the world of transaction banking is not what it once was, it’s in turmoil. Although it is still considered risk-free and ‘sticky’, to a large extent, and offering 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. As to what the future will hold, it’s a case of watch this space. 

The complete PwC European transaction banking survey 2015 is available for free download at www.pwc.be