Growth in Transaction Banking

Comment Posted on behalf of Suresh Viswanathan, Senior Technology Officer, Barclays Commercial Bank -

Growth in transaction banking can be viewed over two phases. First, with the banks going global and targeting the large corporates. More recently, market efficiencies and technology have been driving growth in the mid market segment.

Like the time when mobile phones were for the rich and famous only, Banks when they went global, had to deal with lots of market in-efficiencies. Therefore they targeted the large corporates. In this era, banks like Citi led the market in terms of transaction services. Banks used to profit from market inefficiencies or the famous 'float' - we debit you today, but the credit happens in +2 days.

Markets now have become more efficient because of automation. Mid sized corporates et al, have better automation through the likes of SAP which integrates well with banking payment systems. So now, primarily market efficiency, driven by the commoditisation of the technology that facilitates management of cash flows.

With liberalisation and laxing of rules, more organizations are going global and there is a huge growth in the SME sector. This has increased the demand for payments and trade related services. Asia Pac will see a steady growth in SME and therefore transaction banking for the next few years.

Comment Posted on behalf of Aruna Rao, Group CTO, Kotak Mahindra Bank -

Thought provoking note! Would be interesting to see if the trend is the same both in the developing Asian/EE markets as well as the US/European markets.

Transaction banking will provide information to tailor products Investment banking

Posted on behalf of Ganesh Baliga, Vice President, Citi GTS.

A couple of thoughts here...what is behind the success of transaction banking..

a. Increased flows of goods and money and securities that means that every Chinese company in Africa and South America uses both case and trade services. Also every decent fund manager has some emerging market funds.

b. The fact that this is a high investment business but a long term partnership. It is alomost like investments in utilities and infrastructure in equity parlance.

c.  The tremendous opportunities in cross sell ...in fact pure investment banks will realize more and more that transaction banking will provide so much information to tailor products for customers knowing what a customer is doing...that information is extremely valuable for "front office" selling.

Move from 'Charter Plane' to 'Flight Sharing'

Posted on behalf of Saurabh Nimaiyar, Program Director, Citi GTS Technology

The fundamental of the transaction banking is the ability to do a transaction quickly & cheaply. E.g. how soon and how cheap a payment can be made. This is all that concerns a customer.

The growth in transaction banking is due to a number of factors. All of them have one way or other helped in trimming down the time & the cost of a transaction and in parallel providing opportunities for additional value-added services.

Some of these are:

Expansion of the global network: 

The world has become a truly global village. With boom in the telecom industry & internet related technology, the corporate, the end consumer and the banks have all become very well connected across the globe.  Taking example of the transactions banking network, SWIFT that connects the banks is now connected to a number of Corporate via SCORE & SWIFTLite. The network of Visa and Master card is ever expanding and reaching out to all corners of the world. EuroGiro, Post offices & a number of remittance service providers have also been linked with each other. People around the world can much more easily send money or pay for a service or buy a product via their card, internet and of course bank accounts. Each & every day, more & more paper money is now turning into electronic and flowing through the financial network. The market has expanded and continue to grow for everyone in the transaction banking business..

The global network expansion introduces new opportunities for all players of the industry.

Regulatory & Market initiatives:

There has been a number of regulatory and market changes especially in Europe e.g. SEPA, Target II, PSD, and Faster Payments, which are enforcing standardisation and creating a level playing field for everyone. A number of these initiatives have gone to the level of defining the standard format e.g. ISO XML20022 for SEPA, mandating non-truncation of 140 characters of remittance information. This kind of things was unheard  5-10 years ago. The days of making money through exotic services are diminishing and it’s moving towards economy of scale by commoditizing the transaction services. After the success of Target II for cash - Target II for securities is in progress allowing settlement to happen much more real-time.

These initiatives pose difficult challenges for the bank and also present with opportunities for further growth.

Technology innovations:

Technology is the backbone of the transaction banking. Be it e-commerce, m-banking, e-invoice, it’s changed the face of the banking & continue to provide new ways of doing the business. The banks have realised that and have invested & continue to invest heavily in their technology infrastructure which gives them a standard, scalable & global operating platform and decreasing the operating costs and increasing the revenues. There has also been surge in the business of sharing the infrastructure & the services. Rather than having your own charter plane, we are moving towards ‘flight sharing’.

Technology innovations have changed the face of the transaction banking and introduce whole new opportunities for the banks everyday.

In a nutshell, the companies are going truly global. Large Corporate are setting up shared service centres, offshore centre of excellence by leveraging their ERP applications. They need one view across all their entities across the globe.  Banks are moving towards RPC (Regional/remote processing centres) across the globe by utilising their standard payments & back-office platforms.

Overall, this manifests the opportunity to market a number of products from one stream of the business to other. E.g. one electronic banking platform for all cash, trade & securities services, one treasury view across all the entities, cross-selling cash & payments products to a trade or securities customer - a win-win situation for everyone…! 

Well said Prashant..

Infact Transaction Banking is bucking the trend in IT spend. While analysts are predicting upto 15% fall in IT spend from Banking, spend on Transaction Banking is predicted to go up by 8%. There is altogether new thrust on Transaction banking business by banks due to low risk, low capital requirements and prospectus of better and stable income. Recent Misys-Finextra survey reveals that 45% of Banks will increase budget for Cash Management and Transaction Banking next year. At Sibos 2008, JP Morgan annouced that they are inveting 1 bn USD in 2008-2011 for single integrated system for Cash Management, Treasury Services and Liquidity.

Integrated transaction banking is definitely area of growth in the current scenario.

The story in Asian banker - 'IT spend on transaction banking stays strong' talks about this trend.

https://www.theasianbanker.com/A556C5/Update.nsf/0/A67CB8193E56C64B482574CF003151E4?OpenDocument