Market conditions are getting tougher for transaction bankers, with new threats and issues appearing from many quarters. Success in this new landscape will require quick thinking, innovation and strategic collaboration.

There is no doubt that transaction banking has experienced something of a renaissance in recent years. Once overshadowed by the glamour of investment banking operations, the dowdy daughter of the banking world quickly found itself the darling of the post-crisis landscape, thanks to steady returns and a socially acceptable business model.

Its relative importance may have increased dramatically, but transaction banking’s star is arguably no longer on the rise. Instead, it now finds itself fighting to maintain its newly attained position amid a multifarious array of threats, including incoming regulation, new market entrants and increasingly harsh inter-bank competition.

For banks, transaction services continues to provide good returns, and the industry has seen significant investment over the past 12 months, but its appeal makes for limitations too; steady, dependable returns are a symptom of steady, dependable demand, and the pool of potential business is necessarily finite. Meanwhile, the struggle for this coveted customer base is growing ever tougher.

New entrants

Banks that had hitherto paid little attention to their transaction banking operations are pouring money into this neglected corner of their business, poaching senior bankers, and in some cases custom, from the larger, more established players.

At the same time, the market has seen new entrants threatening the traditional transaction banking model operated by large international banks. These new players often originate from outside of the traditional banking sector, and have made the most of their innovative and agile nature to exploit inefficiencies and weaknesses in the current system, attracting business in certain niche segments in the process.

Thus far, many payments success stories, such as PayPal or Kenyan mobile money scheme M-Pesa, have been confined to the consumer sector, but these providers may begin to make their way up to the corporate level. PayPal already allows an individual to essentially operate as a business, it could well begin to target larger-scale users. Square, on the other hand, already allows small businesses to accept card payments via smartphones.

For now, the threat from these alternative providers is modest, but it may not always be so, and banks must be vigilant. Nevertheless, it is not all bad news; new entrants may also present an opportunity for collaboration.

Cyber crime

There are threats of a different kind, too. To name but one, transaction banking’s newfound popularity has meant it is attracting attention of a quite different, and entirely unwanted sort; cyber crime. An increasing amount of business and corporate banking is now conducted online, and the huge sums of money involved make these accounts a tempting target for hackers and fraudsters. 

Cyber security has been something of a taboo subject among banking executives, who have been reluctant to admit weakness or present themselves as targets to 'hacktivists' with a point to prove. Attackers are becoming more and more sophisticated, however, and the issue is now too pressing to ignore, and too widespread to tackle alone. The solution, bankers and technologists say, is greater information sharing on criminals and their attack methods.

Broader concerns

Transaction banking is not immune from broader concerns either. In the West, economic recovery is at best faltering, and in some territories non-existent. The European debt crisis is a persistent worry, and in the US, sluggish growth and a ratings downgrade hardly point to a thriving financial sector.

Even in booming Asian and Latin American markets there are worries of potentially dangerous inflationary pressures.

There is another sizeable hangover from the 2008 crisis too; a veritable mountain of regulation. On both sides of the Atlantic, the amount of incoming legislation is becoming almost unmanageable, bankers say. Transaction services are rarely the specific target of a regulatory crackdown, many new measures are a result of law makers' attempts to avoid another global economic meltdown. However, the sheer volumes make unplanned overlap and unintended consequences almost inevitable. Nevertheless, regulators appear to be listening to industry concerns, and bankers seem positive that the worst of these can be avoided.

Times may be getting tougher for transaction bankers, but for those that are able to adapt to a new landscape there are still numerous opportunities to gain business, net new customers and take advantage of underserved market segments. Doing so, however, will require careful navigation.  

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