The transaction banking landscape is undergoing a period of significant change, leaving bankers with the task of navigating competitive and regulatory pressures while staying focused on innovation and operating efficiency. At a recent round table hosted by The Banker, a panel of industry experts discussed these issues and how they are often intertwined. The event, part of an ongoing series, was sponsored by Royal Bank of Scotland, but independently written and edited.

Transaction banking enters a new phase panel

The state of the global economy is continually debated, but for transaction bankers at least, one measure of the strength of the economy is the level of customer traffic and demand for services. With this in mind, Kevin Brown, head of global product management for Royal Bank of Scotland, says that transaction bankers have reason to be optimistic. He perceives the current mood in the transaction banking industry to be one of “practical optimism”.

Developments in the eurozone are being paid particular attention by bankers around the world, and transaction bankers are no exception. “There is a lot of focus on the eurozone, not just around the economies in the eurozone, but the challenges in terms of the euro currency. From a transaction bank perspective, that means looking at how we can ensure – should there be changes in the future – we are able to continue to support our customers through those changes,” says Mr Brown.

While Mr Brown speaks of “practical optimism”, Mark Hale, head of payments at KPMG, describes the current environment as more one of “cautious optimism”. Given the situation in the eurozone, “there are going to be people who need to change their operating model”, says Mr Hale. There are likely to be winners and losers, but “there is plenty of scope for opportunity”, he adds. 

Emerging opportunities

Chae An, vice-president of financial industry solutions at IBM, points to the opportunities that lie beyond the eurozone, as well as to “the enormous growth that we are seeing in Asia and emerging markets, which, despite the issues that [they] have had over the past few years [with the global financial crisis], are still growing fast. I see a lot of opportunity there.”

These opportunities are changing the balance in the global economy. Wim Raymaekers, head of banking market at Swift, says: “I think we are starting to see more of a multi-polar economic and currency system. We had the big US and euro bloc and what we are seeing now, for instance, [is that] the Chinese are promoting their currency – the renminbi – to become one of the world’s major currencies.”

This is bringing about changes in the ways that transaction banks keep pace with their customers, and follow them and their businesses into the growth markets. And while the pattern of global trade flows alters, customers are expecting increased efficiency and reduction in costs, especially as they become more internationally minded.

“The cost of cross-border payments is still relatively high. This is probably an area where from both a competitive perspective and an economic perspective there is likely to be considerable change over the next five years,” says Mr Brown.

In this new environment, Mr Hale believes that banks will have to compete on efficiency through value-added services. “I think the transaction banks are going to respond by competing with slightly different operating models, but on efficiency and value-added services as opposed to overcoming structural barriers,” he says.

We had the big US and euro bloc and what we are seeing now, for instance, [is that] the Chinese are promoting their currency – the renminbi – to become one of the world’s major currencies

Wim Raymaekers

Close competition

The attention that transaction banking has received since the financial crisis, especially at senior management level in banks, has meant that more institutions are focusing on the sector. It could be argued that this has increased competition and that there are too many players in the market, but Mr Hale says: “Transaction banking has always been competitive.”

Mr An agrees, saying: “Competitive pressures have always been there, but maybe it has been exacerbated over the past few years.” He adds that there has been a rethinking of strategy and a need to separate out core from non-core businesses. Transaction banks need to “focus on those areas they can be very good at, and for those areas that are not really core, which other people do, they can collaborate with other banks to provide those services”.

Aside from being forced to ask big questions about their core strategy, transaction banks are facing other competitive pressures, such as the need to keep up with technology so that they can respond to the demands of their customers. Mr Raymaekers cites mobile payments as an example of a technology that is making headway and is being prioritised by banks. “We are moving to a right here, right now type of payment,” he says. And this in itself brings pressures for the back-end payments processing to be in real-time.

Mr Brown, who is chairman of the UK’s Faster Payments Scheme, points out that the challenge is not just for commercial banks, it is also for central banks in terms of settlement. He illustrates this with an example of what 24/7 faster payments means in practice. “People buying cars would have traditionally used cash, cheque or a bankers’ draft. If they were in a showroom they may have paid by card, but now people are using faster payments to make that payment. Now they can do it all on a Saturday – they can pay for the car, the seller can see the money in their account immediately, and they drive the car away,” he says.

Commenting on the move to faster payments, Mr Hale says: “I think we are heading toward a brave new world and immediate payments will change consumer behaviours. The new retail interfaces and channels are really going to drive that.” 

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This is an edited video of the discussion from The Banker's Exclusive Leadership Series. Click below to view more:

Regulatory worries

Regulation is another pressing issue for transaction banks, with concerns over the level of new regulation and balance sheet requirements. “I think the way banks manage their balance sheets, both in terms of lending and attracting deposits, is going to change the competitive landscape,” says Mr Brown. “Clearly that focus has an impact on the products that are offered and, of course, the pricing of those products in the market.”

Mr An says that in this new regulatory environment, banks are faced with a dilemma: they want to innovate but are held back by their current businesses and legacy systems as well as the pressures of complying with new regulations. “Often the banks do not have the budget to really go after some of the new innovation,” says Mr An.

There are many areas of regulation that are in themselves topics of debate. When asked which areas of regulation most concern him, Mr Raymaekers highlights one area of the Dodd-Frank Act in the US that will greatly impact transaction banks. Correspondent banking, he says, will be particularly affected by Dodd-Frank’s regulation E, section 1073, which states that banks have to provide more transparency to their clients on the charges, such as transaction fees and foreign exchange conversion costs.

“The transparency that now has to be provided upfront is something very difficult on the back of a correspondent banking agreement because correspondent banking is by definition a very open model. A large bank might have maybe 1000 or 2000 correspondents,” says Mr Raymaekers.

Having to provide such granular information on the cost of payments puts enormous pressures on banks. Transparency in the pricing of payments has also been an issue in Europe with the Payment Services Directive, which requires banks to provide as much information to the customer as possible. “It creates an operational issue,” says Mr Hale. One consequence of responding to regulatory changes is that banks could make existing solutions more complex, instead of re-engineering and simplifying in a way that takes advantage of the regulation. 

Innovative thinking

According to Mr An, regulation can also bring opportunities for transaction banks. “On the one hand, it is a cost of business [to] meet the regulations and compliance requirements, but as part of doing that, information needs to be cleaned up and more information needs to be integrated to meet the requirements,” he says. The data and information that is now available can be used for business intelligence to understand risk and customers better.

Mr Raymaekers also believes that regulation can be beneficial, in the sense that the approach to regulation can bring about positive changes. He cites the example of the policy liberalisation in China towards internationalising the renminbi, and the regulatory environment in Kenya that allowed the M-Pesa mobile payments network to blossom. Such innovation in mobile payments for consumers is well known, but is it possible for transaction banks to be this innovative as well?

The way banks manage their balance sheets, both in terms of lending and attracting deposits, is going to change the competitive landscape... Clearly that focus has an impact on the products that are offered and, of course, the pricing of those products in the market

Kevin Brown

“Absolutely,” says Mr An. “There has been a lot of innovation on the consumer side and that is very visible because we are all consumers.”

Mr An adds that there is a lot of innovation occurring in transaction banking, but it may not be visible to most people. Back office, core systems, payments and a better application of business process management as a technology, and rules management systems as a technology, are all areas in which transaction banks can be innovative.

Mr An believes that there will be more adoption of mobile in the transaction banking space. “Corporate clients will be demanding some of these applications so they will have multi-modes of access and multi-modes of interaction,” he says, adding that the applications will have to be consistent, convenient and inter-related. There has already been innovation in terms of multi-channel, multi-mode interaction.

“Some of those innovations will now be adopted into the transaction banking side,” says Mr An. “Also cloud technology will enable a software services model in a much broader way. There will be innovation that the banks will be taking advantage of to provide services that are just as secure, robust, scalable and more easily adopted.” 

Mobile market

When it comes to innovation in mobile technology, Mr Hale says that it has taken a while for mobile to come to market, and he questions the degree to which the banking industry is innovative in this area. “I think we need to look harder at ourselves, not to rest on our laurels, to be very clear about what banks do very well and the innovations that they do, and they should trumpet those. But then I think there is more to be done to bring new value to retail consumers and corporate customers,” says Mr Hale.

Mr Brown gives the Faster Payments Service as an example of the new value being brought to the UK, in particular, the scheme’s efforts to use the payments network as the transport mechanism for mobile payments by linking bank accounts with mobile phone numbers.

While innovation in mobile payments is noticeable at the individual consumer level, the impact is different with corporate customers. Mr Brown says that when talking about innovation it should be remembered that corporate clients have different needs: “Corporate clients are not just one individual, they are multiple individuals and we are starting to see the delivery of services tailored for each individual within an organisation. From a corporate perspective, a chief financial officer may require certain services delivered to a tablet, a mobile or their desktop, or a combination of all three. That set of requirements may be different from the head of their treasury operations or the heads of other parts of the organisation.”

Risk improvement

Transaction banks are also looking to innovate in the area of risk management, especially in terms of credit risk or counterparty risk. For example, Mr An says that there is an opportunity for banks to get a better understanding of credit or counter-party issues for clients by making use of all the structural information available. “This will hopefully translate into much better decision-making for the banks,” says Mr An.

Mr Raymaekers says: “Some of the data within banks is now being increasingly used for business intelligence purposes, for example, gathering data about performance within a bank’s correspondent network management.”

This would involve data that shows the reciprocity of client relationships across business lines. Intelligence can then be delivered to an iPad, for instance, so that the relationship manager can bring up that information during a negotiation with a correspondent bank. “Managing that data and putting it to use for decision-making purposes is increasingly a focus within large transaction banks,” says Mr Raymaekers. 

Joined-up thinking

This is just one of the ways that transaction banks can better serve their clients. When asked what the specific needs of corporate treasurers and financial institutions are, Mr Brown says: “We are seeing a continued drive for a very closely joined-up integration of clients’ enterprise resource planning systems with banking, with the ability to have multiple suppliers. This is driven by the desire to be as smooth and efficient as possible.” He adds that treasurers do not want to log onto multiple systems. 

“They want to be able to transact their business on their platform and know that the payments and transactions will go out of the back of that platform. We have been focusing very heavily on making sure that we have got direct bank-to-client integration so that we can take their billed payments from clients’ platforms and deliver reconciliation back in an automated way,” says Mr Brown.

Mr Hale also comments on the trends in treasurers’ needs: “Like everyone, they have got their department or their business area. They want to maximise the contribution they make to their business, so they do not want to spend the start of the day in reconciliations and trying to find out where their payments are and where their transactions are in the flow.

“They want it to be seamless and they want information presented to them in a way that they can use directly and pass on. They want to do that because they need to optimise their cash positions overnight, but at the same time they want to add value to their customers. The more time a bank can provide through that seamless integration in a way that allows them to add value to the businesses, then the more they are going to trust the banks and be able to deliver great services.”

Mr An agrees and says that banks can provide a lot more services, especially in terms of liquidity management, cash management and cash forecasting to medium-sized corporations, which do not have a large treasury department.

Mr Brown says that there is a continued strong demand for cash management services, “With the low interest environment, companies want to be able to concentrate their cash into one location. We offer services to our clients that allow them to do that – into several different locations – and those pooling arrangements allow them to be as efficient as they possibly can with their surplus liquidity.”

Offering such services is key for transaction banks when competing in the new landscape, says Mr Hale, who adds: “I think this is where banks which structure their global transaction services well, deliver services really efficiently, effectively, reliably and with high trust are going to win and be distinct from those losing in the market. If you get an excellent operational service from your bank, then you are going to store your liquidity and liabilities with that bank, and, of course, that is the cheapest way of creating liquidity and funding parts of your balance sheet.”

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