Digitising the transaction banking world

Digitising the transaction banking world

In the aftermath of the financial crisis, transaction banking was considered a reliable source of income for global banking groups. But nearly a decade on, multiple factors are putting pressure on transaction banks’ revenues. This year’s World Payments Report* suggests banks increase their investments in digital solutions to offer more compelling propositions to their corporate treasury clients.

Transaction banking, in which banks provide corporates with the payments and liquidity management services necessary for business operations, traditionally has been a strong source of income for banks across fee, interest and FX income revenue streams. However, external challenges are putting pressure on these revenue streams.

Each of the streams faces different pressures: traditional fee income from commoditisation of products, interest income from the low interest rate environment and FX income from low-cost alternative service providers. Another source of pressure, according to the Report, is the increasingly ambitious demands from corporate treasurers for digital solutions.

“Banks’ revenue from transaction banking increasingly will be linked to the value-added offerings provided to corporates while profitability will be linked to internal efficiency of operations,” says the Report. “Transaction banking revenues are a mix of volume and value. Volume is the basic condition of offering transaction banking services but differentiation will come from value based on customer intimacy. Profitability will depend on an industrial strategy for plain vanilla offerings and flexibility to deliver added value.”

A survey conducted by Capgemini for the Report found that the centralisation of account management services ranked as the top corporate expectation according to banks and corporate treasury respondents. Centralisation is attractive to corporates because they can improve return on cash positions and gain more control of their cash flows. Corporates’ centralisation efforts include special structures such as in-house banks and shared service centres. Banks’ most recent solutions include virtual accounts for accounting and reconciliation, coupled with sweeping services for liquidity management.

Corporates are also demanding optimisation of transaction banking operations, possibly because streamlined operations will allow corporate treasurers to optimise group cash flows and funding at lowest cost and risk.

While corporates gave a high ranking to fraud prevention and protection services, this was not reflected in the ranking by banks. A senior executive of a leading European payments processor told Capgemini: “Cybercrime and fraud are big challenges that are not necessarily receiving the attention they should get from the market. Recent Swift hacks show that the risks are imminent and authorities will need to determine their responses to these threats”.

Corporate treasurers are experimenting with digital and analytics-based solutions to improve their financial operations. The Report says initiatives are under way in various areas including customer analytics (360-degree counterparty analysis), fraud management (blocking suspect or unusual transactions), operational optimisation (automatic repair, bots) and compliance tracking. For example, corporates are using analytical techniques to improve their customer relationship management systems and to enable product or services refinement. Corporates are using customer engagement data to develop customised operating models for internal or external non-financial transactions.

In risk tracking, analytics have helped corporates to manage their liquidity risk through faster credit decision making on their existing exposure to counterparties. Analytics are also helping corporate treasurers to identify and mitigate risks that arise in procurement and inventory management. In operational optimisation, corporates are implementing enterprise systems that provide unified and standardised transaction reporting across multiple departments and countries. Compliance tracking processes are required to be more agile and responsive rather than depending on AML protocols and fraud monitoring standards. Therefore, corporates are using data from compliance tracking to build governance models that measure exceptions and system tolerances. The successful adoption of analytics by corporates has increased the appetite for such solutions. This can be a catalyst for banks to improve their digital capabilities and provide complementary offerings.

Financial technology (fintech) companies are also posing a challenge to transaction banks. Almost 70 per cent of payments industry executives surveyed for the Report believe that these companies pose a key challenge for banks. Interestingly, both banks and non-bank payments industry participants viewed financial technology companies as the main challenge (71.4 per cent and 69.7 per cent, respectively). The challenge comes from financial technology companies’ ability to innovate more quickly and provide a better customer experience by making use of the most advanced technologies. “Additionally, banks are challenged by fintechs due to their ability to shape and drive customer expectations at a rate with which banks cannot keep up on their own,” says the Report. “While the above industry views might be more reflective of the retail banking business, transaction banks will need to ask how long it will be before such trends apply to them.”

Transaction banks also face internal challenges from legacy technology that has created silos of operations. These structures mean it is often difficult for banks to meet the requirements of corporate treasurers. A tension exists between corporate treasurers, who believe they are not asking a bank for anything particularly new and the bank, which knows its operations are not structured to deliver change easily.

These internal and external challenges faced by banks are influencing their existing business strategies for transaction banking, says the Report. “Banks need to adopt agile practices and the latest technologies to improve their internal processes and meet challenges posed by the external disrupters. As a consequence, a digital agenda should be a top priority for banks.”

Digitisation of transaction banking has gained momentum, according to the Report, and new services such as digital advisory and decision report are being rolled out. Digital advisory solutions that leverage the underlying core banking platform include credit assessment, supply chain financing and liquidity management structures. Decision support digitisation efforts are focused on providing information and tools that can help the corporate to optimise the source to settle cycle.

In the business to business mobile, e-invoicing and immediate payments areas, new services based on mobile devices have been developed such as B2B transaction authentication and reporting. Banks and payment services providers are also adopting electronic invoicing mechanisms to reduce overall transaction processing time. Also, some UK banks are developing corporate access services based on immediate payments systems.

While progress is being made by banks to pursue digital initiatives for corporates, they have also missed some opportunities, says the Report. During the e-commerce boom they ceded much of the space to PSPs such as PayPal, WorldPay and Global Payments and in the business to consumer (B2C) space they have lost market share to financial technology companies.

The Report suggests that financial technology companies have been more successful than banks in adopting a ‘design for digital’ mindset, which has helped them to gain B2C market share. Financial technology companies are active across a wide range of activities in B2C, including sign-up and underwrite, acceptance, authentication and authorisation, transaction capture and reporting. The success of these companies in the B2C domain, particularly in e-commerce, has been fuelled by the proliferation of mobile devices. Financial technology companies have also developed customised solutions such as peer to peer and cross-border payments, which have further increased adoption. The companies have leveraged their agility and technology capabilities to make successful forays into the B2C domain, a trend that might also be replicated in the corporate domain.

Those financial technology companies that are offering transaction banking services are setting a higher benchmark on digital capabilities, says the Report. These companies are offering services in niches such as liquidity reporting, account aggregation and FX. For example, in trade finance, financial technology companies are offering solutions to help corporates manage market and counterparty risks, including supply chain financing, invoice handling and electronic procurement. If banks are slow in digitising their product and services offerings, they may lose some of their profitable transaction banking business to these companies.

In order to address the challenge posed by financial technology companies, the Report says banks should assess their digital maturity across the enterprise. According to the online survey conducted for the Report, corporates have a lower perception of banks’ digital capabilities than do banks themselves. While banks have made progress in digitising services, this has not been recognised by corporate treasurers. The Report says transaction banks will need to increase their investments and focus on better branding and communication to showcase their digital capabilities.

“In order to be viewed as digital leaders, banks will need to invest and establish partnerships with organisations that can help them to execute their strategies for developing digital offerings,” says the Report. A collaborative approach will be a critical foundation for banks if they wish to close the ‘digital gap’ that exists between them and financial technology companies, says the Report. It argues that partnering with financial technology companies will help banks to innovate at a faster rate in order to provide digital services to corporate treasurers.

Nearly 79 per cent of bank executives surveyed believe banks are looking to collaborate with financial technology companies. However, about 50 per cent of total respondents viewed these companies as competitors. Collaborating with financial technology companies is not without its risks. The Report says the main challenges banks will face in collaborative ventures include the financial stability of start-ups, assurances on business continuity, scalability and adaptability of solutions and regulatory considerations.

Another way for banks to increase collaboration with other industry players and accelerate innovation is to provide open application programming interface (API) access to their internal systems. Open APIs can act as enablers for banks to create a digital ecosystem via a bridge with third parties, says the Report. It cites four areas where open APIs offer advantages to transaction banks: new products and services, customer experience, customer insights and regulatory compliance.

Developing a collaborative mindset will help banks stay a step ahead of the competition, says the Report, and they can leverage industry initiatives such as the Payment Services Directive II to develop mutually beneficial business models. These models will help transaction banks to bring stability in treasury operations, reduce financial risk and efficiently adopt regulatory practices.


* World Payments Report is published by Capgemini and BNP Paribas. It is available from Capgemini, stand F80 and from BNP Paribas, stand E48 during Sibos.

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