By Olivier Berthier,
Transaction Banking, Misys
The term transaction banking, although increasingly common, is not yet fully defined within the industry. Different banks have their own interpretations, with a number of business lines potentially coming under the umbrella. Despite this ambiguity, there are two key pillars on which all transaction banking divisions focus – cash management and trade finance. The activities that fall under transaction banking have continued to generate healthy revenue, even in the post 2008-crisis environment. As banks play the cautious card during these uncertain market conditions, they tend to lean heavily on a less volatile, steady stream of revenue that transaction banking provides. A recent Financial Times article (1) noted that transaction banking typically generates a return on equity of 50 to 100 per cent, according to some bankers.
Not only have these activities proved to be stable revenue generators during difficult economic times, but they are at the centre of some of the most interesting developments in the financial services industry. Cash management and trade finance processes have been around for a long time, each existing in a separate silo within the financial institution. Recently, banks have started to take a new approach and are beginning to view the two in a holistic way. With increased pressure from corporate customers, financial institutions are looking to gain a consolidated view into all activities related to a specific client in order to ensure accuracy and improve efficiency.
Customer service takes centre stage
This new approach has a number of drivers. Banks are, as always, looking to increase the efficiency of their cash management and transaction processing, but there is now a renewed focus on the corporate customer. A recent crop of front-end technological innovations allow banks to collaborate more closely with these customers and develop new, tailor-made products.
Historically, banks have focused on processing and the efficiency of the back office. Now, the industry is seeing banks look at their corporate value chain, decide how they are going to sell products and do it in a way that focuses on customer service. The more that is understood about what a client wants the more carefully tailored a product can be. It allows banks to broaden their business and grow their revenue options.
In order to obtain a holistic look of a client’s activity, banks need to have the ability to consolidate all of their views into an account. This increased flexibility in putting together products is largely afforded by a new approach to trade finance. Open accounts, enabled by the increased sophistication of the internet, allow for all parties in a supply chain to share information in real time and use it to make quick, informed decisions. The platform is attracting attention from both trade finance specialists and operators with a cash management background.
With the open account business, which allows buyers and suppliers to enjoy a much more direct relationship, there are better, less risky ways to manage the financial supply chain. It is also generating lots of new opportunities for banks to design new products, not necessarily based on the old, well-defined principles. Demand, in many cases, is coming from corporations, which see how the technology can improve their own supply chain relationships. Customers are now demanding that banks provide faster services at lower costs – driving banks to compete on the transaction banking services they offer in order to continue winning corporates business.
Leading by example
To give a real world example of this trend, a recent project we worked on involved Crédit Agricole and one of its big corporate customers on the import side. The corporate had the objective to improve the way it managed its relationship with some of its suppliers – to help suppliers in the management of their own cash flow. Crédit Agricole ultimately wanted to increase the visibility of its supplier relationships and encourage the more timely notification of statuses and payment-related information. The corporate wanted to be able to roll out the service itself, without having to rely on complex know your customer (KYC) reports from the bank. This is a good example of how corporates are using this new platform to improve relationships with their clients.
Over the short term, several trends will emerge that will shape the development of transaction banking. Driven by the growing sophistication of consumer electronics, mobile technology will come to play a bigger role and will facilitate the approval of payment decisions from any location. In addition, efforts will begin to harmonise financial products in the open account field. Several pending regulatory changes will affect the transaction banking space. The Basel III framework, with its wide-reaching span, is set to take a toll on the trade finance space, in particular.
A lack of standardisation is preventing the full development of financial supply chain services. To reach critical mass in the open account space, the industry needs to come to a consensus. The market needs to have a more standard approach for managing and controlling the flow of data and information from the corporate entity, whether that is the goods manufacturer, exporter, importer, owner of the business, through to the bank or banks used in the transactions along the supply chain. If the information flow was more standardised, it would make the processes around cash management, trade finance and the services supporting each, much more efficient. Already, there has been a lot of fruitful discussion among many market participants and we are optimistic that we will see great gains made on this issue over the next 12 months, which will benefit the industry as a whole.
1. FT Article link