Banks are recognising the importance of transaction banking to global operations, pushing it up the hierarchy of their organisational structures and reaping the rewards of a more holistic client experience. 

Ask a transaction banker to describe their business and they may say it is core to what banks do. Existing for as long as banking itself, its products and services keep the wheels of the real economy in motion.

To those working in the industry, transaction banking has always been important, but in recent years the business has been steadily getting more recognition from others. “A lot of banks have woken up to the potential [of transaction services],” says Naveed Sultan, global head of treasury and trade solutions at Citi.

And while more banks around the world have been paying attention to transaction banking, the incumbent global players have been overhauling their organisational structures. It is not so much that the strategy of global transaction services (GTS) has changed fundamentally, but rather its place within banking as a whole. “We believe this is the next frontier of banking that has not got the recognition in the industry yet,” says Mr Sultan.

No longer misunderstood?

Historically, says Julian Wakeham, global transaction banking leader at consultancy PwC, transaction banking was a cost centre, not a profit centre. For this reason, he says: “Transaction banking is slightly misunderstood at the board level.”

That has begun to change, however. Stefan Dab, senior partner and managing director at consultancy the Boston Consulting Group (BCG), says the strategic and financial merits of transaction banking have been recognised in the past three to five years: it does not use a lot of capital, it provides liquidity and enables stickier client relationships.

“Transaction banking, if you do it right, has attractive returns,” says Werner Steinmüller, Deutsche Bank’s head of global transaction banking. At Deutsche, for example, transaction banking's return on equity, cost-to-income ratio and other metrics fare well compared with other divisions of the bank.

And in terms of liquidity, Mr Steinmüller estimates that transaction banking generates about €170bn of liquidity in deposit volume. “We only need 50% for our business so about €85bn is given to Deutsche Bank to finance other businesses. Imagine financing that from the capital markets instead,” he says.

The question for banks in recent years has been how to structure their organisation so that they can make the most of these merits.

 

RBS reorganisation

Carole Berndt, global head of transaction services at RBS, explains that back in the 1990s, transaction banking was seen as the engine room, without the prestige of corporate or investment banking. “GTS as a product group became more relevant in the financials and balance sheet of the bank as corporates became more multinational and more complex,” she says.

At this time, she explains, GTS was managed around the corporate and the investment bank as if it was another product. Then banks split into two camps: either they tried to keep transaction services within the corporate and investment bank structure or they positioned it as a standalone unit.

Banks sit at different places on a continuum, which has the integrated structure at one end and the standalone business at the other. Since the financial crisis, banks that were at the integrated end have moved towards the standalone model and vice versa, she says.

RBS has recently reorganised its structure for the second time in just over two years. In January 2012, the bank moved GTS into the newly created international banking division. And in February 2014, the bank announced that its seven divisions would be reduced to three. Now the bank’s GTS business – which caters to large corporates and financial institutions with complex, cross-border needs – sits under corporate and institutional banking, while the UK transaction services business sits under commercial and private banking.

Climbing the hierarchy

Ms Berndt says that previously the position of GTS in the food chain of RBS was not reflective of its ability to compete at its most effective with its peers. In the new structure, Ms Berndt reports to Donald Workman, the chief executive of corporate and institutional banking. “GTS now holds a higher position in the hierarchy and has a stronger voice in the bank,” she says.

Since the restructuring was announced in February, Ms Berndt says that she has been able to raise the profile of GTS by reorganising and hiring people from inside and outside the bank. And in May this year, RBS announced five new senior hires for its GTS team.

RBS is not alone in its restructuring. The major global transaction banks – Citi, Deutsche Bank, HSBC and JPMorgan – have also realigned where transaction services fits within their organisations.

At HSBC, which was one of the first global banks to initiate an organisational restructuring, a transaction banking or transaction services division cannot be found. Instead, the business is broken into its constituent parts – payments and cash management; trade and receivables finances; and securities services – that work across the bank’s segments.

In July 2012, JPMorgan reorganised and created its corporate and investment bank (CIB) by merging the investment bank and global corporate bank with treasury and securities services. Under the new structure, the treasury services division is housed under the banking division of CIB, and investor services – formerly known as securities services – sits with the markets division of CIB.

Jeff Bosland, global head of treasury services at JPMorgan CIB, explains that the structural change was about “making the client experience holistic within one organisation [of CIB]”. He adds: “We are seeing the benefits from forming the CIB. Business is growing, and [multinational corporations] in transaction banking are growing market and wallet share.”

Where do transaction services sit within a banks structure

Optimal structure

A few months after JPMorgan announced these changes, Deutsche Bank announced its own take on the optimal structure. In September 2012, Deutsche announced its Strategy 2015+ in which global transaction banking (GTB) became one of the four pillars of the bank. GTB serves corporate, financial institutions, non-financial institutions, dealer brokers and asset managers with a range of services that include cash, trade, securities services, trust and liquidity management.

With GTB as one of its pillars, Deutsche Bank is the only large global transaction bank to dedicate one of its major divisions to transaction banking. “I am reporting straight to the CEO so that shows the importance Deutsche Bank places on transaction banking,” says Mr Steinmüller.

Previously, Citi had an organisational layer that was dedicated to transaction services, but that has now been dismantled. In April 2013, the bank removed the Citi transaction services layer and moved treasury and trade solutions (TTS) into banking and the securities and fund services (SFS) business was moved into markets because of its proximity to capital markets. TTS remains as an independent business line, which reports to the chief executive of the institutional clients group.

“It was a natural evolution of our organisation,” says Mr Sultan. He explains that when Citi transaction services was put in place, the two underlying businesses – TTS and SFS – were relatively small and this positioning gave it more visibility, market and institutional recognition.

Since then TTS and SFS have grown into large business lines and the layer of Citi transaction services has been removed so that the underlying businesses can be elevated and aligned with other parts of the institutional clients group. “Clients appreciate the logic and find us more responsive, more focused and we also have even higher visibility in the company today,” says Mr Sultan.

When asked if TTS has now become more important within the banking group, Mr Sultan says: “It has always been exceedingly important.” He explains that this change positions the business for its next phase of growth and evolution.

“If you think about Citi as a business model, it has two key attributes: globality, and deep and embedded client relationships. TTS primarily underpins both those attributes and therefore it is strategically a very relevant business for the company,” says Mr Sultan.

Of the different organisational structures, Mr Dab at BCG says that a compromise has to be made somewhere as banks are caught between the desire to create scale – and thus centralised standalone units – on the one hand, and a desire to create synergies with the lending and investment banking businesses on the other.

Towards integration

For Mr Wakeham at PwC, the continuum of different organisational structures has product line at one end and an emphasis on the bank’s franchise at the other.

“Historically there was a tendency to put products in place. The next wave after that is to integrate those products better into the franchise and to have a whole bank experience without getting product silo behaviour,” says Mr Wakeham.

He notes that many regional banks – for example, banks based in Canada, Australia and Japan – have in recent years put product-based management structures in place. For the global transaction banks, such as HSBC and JPMorgan, there has been a greater emphasis on the franchise and they have de-emphasised the product silo, he says.

Of the large global banks, Mr Wakeham says: “It’s not that they got rid of the product organisation. The balance of authority in the way they report their business is driven by franchise alignment rather than product line.” With this move to the franchise model comes an emphasis on investing in client experience and value propositions, he says.

Where do transaction services sit within a banks structure 2

Client first

This notion of client-centricity is echoed by all the senior executives interviewed for this article. JPMorgan’s Mr Bosland says: “The concept of combining the businesses was centred on best serving our clients. We are a broad-based firm of products – we are not product-siloed. We deliver banking services, investor services, market products and investment banking coverage with a holistic client approach.” And for Mr Steinmüller, the thinking is similar: “We are organising around the clients,” he says.

Mr Wakeham also notes that there has been a rationalising of the coverage model at global transaction banks, where a relationship manager is responsible for delivering across the bank.

When it comes to product sales at Deutsche Bank, Mr Steinmüller says the relationship management unit coordinates with the investment bank, transaction bank, the wealth management division, and so on.

"In the past, relationship managers in the investment bank only sourced investment banking products," says Mr Steinmüller. Now the proposals that relationship managers put to their clients include transaction banking. For example, if there is a bond mandate, the investors will be offered trust services as part of the proposal.

Deutsche Bank has won some significant deals because of the strength of the bank's transaction banking capabilities, says Mr Steinmüller.

Previously a bank had many touchpoints with the clients, for example, with trade finance or foreign exchange. But, says Mr Wakeham, “it was very difficult to see the whole client position. Increasingly, both for financial performance and because of regulatory reasons, banks are having to get much better at understanding their clients.” This is a challenge for transaction banks whose strategy in the past would have focused on product advantage and scale, he says.

BAML boost

Many of the executives interviewed for this piece spoke about leveraging internal structures and relationships, something that Bank of America Merrill Lynch (BAML) has also been aiming to do.

Through the acquisition of Merrill Lynch in 2008, Bank of America acquired global clients but it did not acquire a similar share in GTS. In recent years, BAML has been boosting its GTS and concentrating on building its capabilities outside North America. The bank’s strategy has been to offer GTS products to its existing clients – and making those relationships more profitable – rather than looking to win new clients.

Some of BAML’s former Merrill Lynch clients, for example, may have been using up to 30 banks for their global cash management and payments. BAML’s GTS offering aims to improve this situation.

The bank has been working to integrate its transaction services products into the global banking division – which includes global corporate, investment banking and commercial banking – and aims to utilise all the relationships across the bank. BAML wants to avoid creating siloes in its product capabilities.

One senior banker at BAML says: “It’s not that GTS is now everybody’s favourite thing. It has always been what a bank is – it is so core to what a bank is.”

When it comes to the perfect structure, BCG’s Mr Dab says: “It’s not that there is one organisational model that I would advise as best practice.” He adds that there will always be tension between creating synergies and creating focus. “Where the banks are the leaders is around the management processes that they put within the organisational structure,” says Mr Dab.

Ms Berndt echoes this view: it is not so much the organisational structure itself but the leadership. “If you have got the right people then it works,” she says. “The success is a direct result of the people you have. It is about creating an organisational environment in which they can succeed.”

Transaction services within a bank's structure

These charts are simplifications of the organisational structures of the major global transaction banks: Citi, Deutsche Bank, HSBC and JPMorgan. They may not use the term transaction bank to describe themselves and the area of transaction services – or transaction banking or treasury services – is categorised differently at each of the banks. For this reason, it is rare to find rankings of the transaction banks because their activities – such as cash management, payments, trade or securities services – are broken down and reported in different ways, making like-for-like comparisons difficult.

Also, in terms of geographical coverage, a bank may have a global network, but its activity can vary from market to market. For example, Citi has a broad global network, but would not have the volume concentrations of RBS in the UK.

In the case of HSBC, the diagram is not an organisational chart, but rather a description of the bank’s main activities as outlined in its 2013 annual report. HSBC’s organisation, as for the other banks, is complex. In the management structure of the commercial banking division, for example, it is divided into a segment view (business banking, mid-market and large corporates), as well as a product view (global trade and receivables finance; payments and cash management; credit and lending; and others).

These charts also do not account for the geographical coverage of these global banks. Citi, for example, operates on a matrix structure. It is also divided into four regions: North America; Europe, Middle East and Africa; Latin America; and Asia. This means that a regional head of treasury and trade solutions (TTS), for example, would report to the head of a geographical region, as well as the head of the TTS division.

The diagram of Citi shows only the Citicorp branch of Citigroup’s structure, which also has a branch for Citi Holdings. Likewise, Deutsche Bank also has a unit that is not included in this chart – its non-core operations unit, which is not considered one of Deutsche’s four pillars.

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