Inspiring Innovation: The Transaction Banking Perspective
An interview with Michael Spiegel, Global Head of Trade Finance & Cash Management for Corporates, Global Transaction Banking, Deutsche Bank
In this month’s Executive Interview we are delighted to welcome back Michael Spiegel, who looks at some of the changes that are taking place in the transaction banking space, and the threats and opportunities that these present.
As 2015 comes to a close, what characteristics of the transaction banking market would you highlight that are setting the agenda for the coming year?
Both the bank and our customers are living through interesting times in transaction banking, from both a cash management and trade finance perspective. In trade finance, margins are being compressed as a result of low commodity prices and high levels of market liquidity. From a cash management perspective, interest rates remain at historically low levels and in some markets at a negative rate, while market harmonisation through SEPA and growing competition from both traditional and non-traditional players is also resulting in narrowing margins. Some bankers and commentators expect more ‘normal’ conditions to return when interest rates rise, but we would seem to be at or near an inflection point in the development of cash management and trade finance.
This inflection point is the result of two key trends converging. Firstly, complexity. Corporate treasury is becoming more complex as a result of wider geographic coverage, the emerging need for more efficient data management and analytics, and higher volumes, particularly in payments and collections. These in turn are resulting in the need for more sophisticated liquidity management solutions and broader, more integrated risk management. The use of the term ‘solutions’ rather than ‘products’ is deliberate. Complex and diverse treasury needs demand not products that solve isolated problems or address individual requirements, but solutions that span the working capital value chain from short-term lending through to FX, trade finance, cash management etc.
The second development in the evolution of transaction banking is the impact of new market entrants, particularly financial technology providers. Innovations in the way that people and businesses pay and receive funds and access services are having a profound effect on business models and expectations amongst service users.
To what extent do these financial technology providers pose a threat to traditional banking services?
The transaction banking industry is being transformed, and banks need to ensure that they are drivers rather than passengers in this transformation. The most significant changes have taken place in the retail space so far, with traditional business models for accessing services and making or receiving payments being overturned. New solutions focus on consumer-led self-service and convenience, leading to the growth of aggregators, mobile commerce, and mobile payment solutions. As banks, we should be under no illusion that some of these newer market entrants, which include both smaller start-up businesses and large, established enterprises, could replace some of the services traditionally served by us. But this phenomenon is not restricted to the retail space: in the wholesale market too, ‘disruptive’ players and business models will also have an impact on the way that corporates and institutions do business, and therefore the needs that they will have from their banks. It’s an interesting environment for banks: fintechs can be our competitors, customers and partners at the same time.
In some cases, banks consider this ‘disruption’ to be a threat, and undoubtedly it poses challenges, but equally, it is an opportunity to harness innovative technologies and partner with leading enterprises to benefit our customers.
How could this work in practice?
In many cases, we have known and worked with these financial technology companies for some time: indeed, for many years in some cases. For example, we already act as a cash management and settlement provider to payment solutions providers, including embedding foreign exchange into payments and collections through our FX4Cash product. This provides users with the ability to streamline processes, avoids the need to maintain accounts for each currency and eliminates FX risk.