The Future of Transaction Banking

The days of having separate business units responsible for cash management, payments and trade finance are well and truly over as an ever-increasing number of banks have integrated their transaction banking businesses by creating a single transaction banking group or plan to in the near future. While many are still challenged by complexity in their IT environments, this shows a consistent strategy across the industry of becoming much more aligned with corporate customers' needs.

In an increasingly regulated environment, the fee-based transaction banking business not only survived, but is now seen as a core element of any bank’s financial services business. With success has come greater competition, lower margins and an understanding that inefficiencies and legacy processes in the business can hamper future growth. Banks are searching for ways to be leaner and increase the value from existing revenue streams, yet be more scalable to take advantage of global opportunities across trade and supply chain finance, cash management and payments.

Meanwhile customers are demanding more integrated product and service delivery and greater transparency across trade, cash management, payments and FX. With a unified approach, banks can streamline back office processes to deliver market leading and innovative front end transaction services. Improved operational efficiencies gained from this strategy, coupled with augmented capital management will enable banks to increase the value of their transaction banking business, stay ahead of the competition and keep customer loyalty high.

Dealing with multiple challenges

While the global financial community continues to struggle back from the economic collapse of 2008, transaction banking has remained one of the few stable areas within the bank. The cash management, trade finance, payments and securities services businesses all experienced low capital requirements, stable earnings and product growth over the past few years.

Stringent regulations and legislation such as Dodd Frank, Basel III, and Single Euro Payments Area  (SEPA) as well as the entrance of new non-traditional payment providers are driving change in the global financial industry and need to be addressed head on.  Regulation continues to be seen as a major challenge to growing revenue. While regulatory compliance has a cost, regulations such as Basel III have had a visible effect on banks participating in trade finance. The uncertainty and anticipated rise in the cost of capital under the key ratios of Basel III led many banks to divest from Trade Finance assets, limiting the growth potential in an otherwise stable business. Much lobbying for the industry in Europe has led to exemptions around the cost of capital from the European Parliament, but only for European banks trading in Europe. Asia, the biggest growth market for trade finance, has yet to play its hand or influence local regulators to make changes to these rules.

The payments business is undergoing a fundamental transformation; preconceived notions of who will survive and flourish in the new payments landscape. Financial regulators across the globe are opening payments up to competition. At the same time, standards such as ISO 20022 are levelling the playing field for payments industry participants. By harnessing modern payments infrastructures banks of all sizes can compete in this new world of payments. While there are compliance pressures and costs associated with standardising and playing within new payments systems, there are opportunities for banks to leverage modernisation and seek to grow the value of payments by streamlining complex payment flows.

The high growth in electronic payments could also be challenging as it creates the need for banks to manage increasing volumes, securely and efficiently. New ways of initiating payments via mobile and online services, often by new payment service providers that banks now have to deal with. This is a potential challenge for banks, as these new providers can disinter-mediate the users from the banks, reducing revenues and cross selling opportunities. If you don’t know what your clients are doing and what they want then how can you remain relevant to their needs? As the younger, tech-savvy generations start to use electronic payment services they simply don’t understand why a payment can take three days to clear. Everything else is real-time so why aren’t banks? Similarly, corporates now prefer real-time payments which facilitate better cash management and boost working capital efficiencies.

Regulators are demanding more information, such as data on remitters to help track criminal activity and punish those assisting them. There have been a number of heavy fines in this area in recent years; under current frameworks and existing standards, banks struggle to consolidate their payment flows and benefit from the transparency and processing power required to cope with these new demands.

Looking ahead

As transaction banking self-service channels evolve, banks will get better at managing the on-going development of mobile channel alongside the more established browser-based or desktop applications. Driven by customer demand and banks’ desire to be seen as innovative, new functionality that is well-suited to the interface and portability of smart devices will likely emerge.

The majority of people perform their personal banking online and increasingly via mobile devices. It is becoming the norm for consumers. Corporate treasurers and transaction banking professionals now expect all their services from banks to be available via the same channels.  Competition in this space will only intensify over the next decade, as everyone vies for a slice of the mobile transaction pie. In our last Global Transaction Banking survey , mobile channel development was a growing trend with 45 per cent of the banks ranking  mobile banking as a priority in 2013, while 63 per cent said expanding self-service channels such as mobile would be part of their strategy over the next three years.

Even amid regulatory flux banks of all sizes have an opportunity to continue to not only protect their core transaction banking business, but to move with the times and march on from a period of capital preservation, into a new era of growth. While the changing landscape provides challenges it also provides the foundations to foster new business solutions and value added services for customers. New technologies that leverage and complement existing systems can enable banks to deliver fully integrated corporate services that increase client reach, broaden revenue options, improve operational efficiency and win on customer service. The push to gain transparency and control today, requirement to comply with regulation, can have a positive effect tomorrow. Having this consolidated management, visibility and processing power across transaction services can provide the agility banks need to deliver the services that corporates demand today, while also paving the way for future innovation.

About: MISYS is at the forefront of the financial software industry, providing the broadest portfolio of banking, treasury, trading and risk solutions available on the market. With 1,800 customers in 120 countries the MISYS Team of domain experts and partners has an unparalleled ability to address industry requirements at both a global and local level.


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