TRANSACTION BANKING
IBS Journal February 2018
29
Emerging dynamics of Transaction Banking systems
Transaction banking is one of the fastest growing lines of business in corporate banking. There is a wide variation in the capabilities of technology solution vendors, and so it is imperative to have a well-designed approach to system selection and deployment
Sudeep Nair
Senior director, Cedar Management Consulting International LLC
T
ransaction banking is one of the fastest growing segments in corporate banking, growing at CAGR of about 10% and is expected to account for 30-40% of corporate banking
revenues by 2021. The key driver for this growth is the low cost of capital required for transaction banking, and the opportunity to enhance customer retention and cross-sell.
Transaction banking service portfolio
Essential services provided by leading transaction banking units are as follows:
• Liquidity management: Large corporate customers typically tend to have multiple banking relationships for convenience and diversification of exposure. However, this leads to fragmentation of their deposits, and unnecessary charges and fees. By offering liquidity management solutions such as sweeping, netting and pooling, banks can incentivise clients to consolidate their banking relationships with them. In the past, liquidity management services were constrained by the need for delivering liquidity management instructions to the bank in written form. But with the improvement of e-banking channel capabilities, it is possible for corporate clients to self-manage liquidity on their accounts and get a consolidated view of their financial position. Hence there has been a rapid growth in adoption of liquidity management solutions.
• Collections & receivables: For corporate customers who deal with a large volume of collections, it is inconvenient to track their status through in-house tools, since it leads to significant reconciliation effort. Some innovative solutions have emerged to address this issue. By offering cash collection, direct debit services and virtual accounts, banks can facilitate the tracking of collections and ensure that the proceeds of collections are retained with them. Advanced MIS capabilities, alerts and trackers make it very easy for customers to optimise their days of sales outstanding (DSO).
• Trade finance: Trade finance services have traditionally been a standard service with very few opportunities for differentiation. However, offering trade services to SME customers can often be unproductive. So banks are now offering trade finance portals to move at least part of the operations into a self-service model. Even though there is still a high dependence on physical documentation, new technologies such as blockchain will dramatically accelerate innovation in trade finance.
• Payments: Payments is easily the fastest evolving area of transaction banking. The two key primary drivers for innovation in the payments domain are the need for speed and the need for compliance to anti-money laundering (AML) and know-your- customer regulations. Large corporate customers expect banks to integrate with their ERP platforms to fully automate the payment process, and at the same time need support to ensure compliance with AML requirements. Some innovations such as B2B Platforms and payment hubs have been developed as a result.
• Supply chain finance: One of the fundamental purposes of banks is to facilitate trade and commerce for the growth of economies. Supply chain finance contributes to this by bringing together the buyers and sellers on a common platform. Banks have hitherto not been able to lend to small suppliers due to inability to verify their creditworthiness. Supply chain finance enables banks to lend to these suppliers on the strength of the buyer’s credentials. This a win-win for all stakeholders: banks can widen their credit footprint; suppliers can get better credit terms; and buyers can get better negotiating leverage with their suppliers. Governments also find this a potential tool to grow SMEs.
• Treasury services: Treasury services have been relatively slow in adopting new transaction banking technologies. The need for direct interaction between the customers and treasurers for advisory services dissuades customers for adopting self-service
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