Cash & Liquidity Management

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The New Corporate Transaction Banking Landscape Corporates win when banks efficiently support their core processes such as ordering, invoicing, accounting and working capital management. Here are five trends altering the nature of transaction banking.

The New Corporate Transaction Banking Landscape

by Pedro Rapallo and Maarten Peeters, The Boston Consulting Group 

Transaction banking products have always been at the core of the relationship between corporates and banks. The role of financial institutions in supporting corporates has traditionally been centred on providing products and services that facilitate the transactional flow between the corporate and its clients and suppliers, as well as providing the appropriate credit facilities to cover short-term financing needs and longer-term investments. The recent and long financial crisis in several large economies, still to be fully overcome, has put significant pressure on the lending capabilities of banks and, by contrast, has made evident the need to reinforce their value proposition to corporates in the transaction banking space, across the spectrum from payment services, in particular cross-border to liquidity management, working capital tools, and supply chain finance.

A state of the art transaction banking offering generates a ‘win-win’ situation for banks and corporates. By excelling in transaction banking, banks earn significant revenues (~25% of global banking revenues, with retail and wholesale payments related revenues expected to reach $2tr in 2023) and benefit from annuity-stream fee revenues, low risk and capital requirements, and high returns on equity of these businesses. Corporates win when banks efficiently support their core processes such as ordering, invoicing, accounting and working capital management. To further the win-win, corporations need banks to keep up with and adapt their offerings to the trends that impact their transaction banking and treasury needs. We see five trends altering the nature of transaction banking and hence meriting the attention of corporate treasurers and their bankers.

1. New market opportunities thanks to globalisation

While Europe is still the largest ‘inbound’ transaction banking market, rapidly developing economies will grow significantly faster during the next decade. This strong growth will be driven by a significant increase of international trade flows, especially with and within Asia, with rapidly developing economies contributing ~ 55% of expected transaction growth. In addition, mid-market and SME clients in mature economies are increasingly transacting cross-border as they seek growth opportunities abroad. Banks will need to respond by developing increasingly advanced international capabilities.

2. Digitisation

The digital wave is changing dramatically how businesses engage with their customers and how they run their business. As they improve their own customer engagement and service levels, their expectations of the digital capabilities of their banks steadily rise. While global banks have been investing heavily in transactional platforms that were initially aimed at large caps, most players are now increasingly downstreaming these capabilities to mid cap clients. Best-practice banks have made digital an integral part of their business across segments and have transformed every aspect of the client experience – including relationship management, channels, products, risk appetite, pricing and customer service. Importantly, they have leveraged digital channels to improve the operations of their clients and have thereby become embedded in their clients’ core processes.

3. New regulation

A new set of regulations issued mainly in Europe and the US in the last five years (Basel III, SEPA, Payment Services Directive; and tighter requirements re Know Your Client and Anti-Money Laundering) are and will continue to severely impact the global transaction banking landscape. Stricter KYC and AML legislation has led to increasing compliance costs and litigation risk for banks. These in turn can have adverse consequences for bank-corporate relationships: e.g., protracted account opening processes, payment value limits, difficulties for banks in supporting corporate international business in less secure jurisdictions. Regulations, however, can strengthen the bank-corporate relationship in cases where banks develop expertise in compliance and can act as advisors to their corporate clients (e.g., SEPA implementation). Finally, the liquidity rules of Basel III – by making operating balances relatively attractive to banks – are already heightening competition for these balances, which in turn translates into more attention to and investment in transaction banking services.

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