Transaction banking has had three good years since the 'masters of the universe' slunk off to lick their wounds in the wake of the global financial crisis. Cash management, trade finance, securities custody and card payment operations all became the unlikely stars of the post-crisis landscape, but now times are getting tough for them as well. Is the honeymoon over for transaction banking?

In the midst of the crisis, the appeal of transaction banking was obvious. It provided steady, if far from spectacular, returns, and even the most ardent of bank-bashers would struggle to blame it for the financial turmoil engulfing the globe.

As a result, many banks began to throw money and resources behind their often neglected transaction services segments; expanding operations and poaching senior staff in an attempt to wrest business from the more established houses. Non-bank players began to make their presence felt in certain niche segments too, providing credit card services for small business or international remittances and the like.

But there is simply not enough business to go around. Those irresistibly stable returns are a symptom of a steady demand that cannot possibly expand fast enough to accommodate an influx of new market participants. Beyond tempting customers away from their competitors, the only way banks will be able to net large chunks of new business will be for the wrong reasons, such as price erosion, extensive credit exposure or taking on clients viewed as too risky by other providers.  

The regulatory environment is becoming increasingly oppressive too. In Europe, a swarm of regulation threatens to engulf the region’s banks, even as their US peers are dealing with the multifaceted implications of the gargantuan Dodd-Frank Act. Meanwhile, Basel III continues to overshadow, and concern, the entire global financial community.

There are still opportunities in this increasingly tough environment, but to take advantage of them may require an adjustment in mindset. Banks must collaborate more than ever before, choosing carefully where to compete, and where to join forces with their fellow institutions and non-bank providers alike. They must innovate too, in a way which may be foreign to the sometimes staid world of transaction services. If they do not, others will be only too happy to.

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