Rise of Transaction Banking
A slew of poor results from the investment banking arms of the world’s major banks has confirmed a major shift in banking fashion. Casino-style investment banking has been fighting a rearguard action ever since the fallout from the financial crisis. Out goes the would-be masters of the universe, in comes banking for the real economy.
As politicians and regulators put the squeeze on banking risk, and as banks continue to redefine their mission, so a new banking term has come into vogue – transaction banking.
Over the past decade the world has seen an explosion of international trade together with shifting trade patterns and a realigning of traditional international trade relationships. The United States is now the world’s largest debtor nation with the US dollar role as global reserve currency under pressure. Sovereign debt has weakened the position of the euro – itself under existential threat – together with many European economies and their over-stretched banks. Meanwhile, the relative strength of China as the world’s largest creditor nation means that more and more transactions were denominated in Renminbi. All this comes against a background of a new wave of emerging economies with increasingly sophisticated banking needs in support of their international trade activities.
Traditional notions of global economic relationship such as trade flows from East to West and North to South are now dated. Where once we took for granted the fact of large corporations from North America, Europe and Japan selling into developing economies, we are now seeing a new economic reality where suppliers, customers, materials and knowledge are located anywhere, globally. The result is a myriad of new trade corridors and this is reflected in the related patterns of transactions.
Transaction banking is the place where banks connect with the real world of physical trade and supply of services that operates in this new reality – services such as trade finance, payments and cash management.
The global transaction bank helps its corporate clients to fund their operations through trade finance where goods are used as collateral); it executes on their behalf numerous transactions and payments, often large, and in a global, multi-currency context.
Transaction banking is a triumph of repackaging: there is really nothing new on offer but a leap in sophistication and a redirection of effort. In fact, transaction banking has generally become a term and catch-all for a range of previously disparate financial services.
For banks, the process of consolidating these historically discrete services in a single division presents major organizational challenges and banks looking to provide an integrated transaction banking service need to recognise that they are relatively stronger or weaker in individual areas.
But for those that manage to sell the transaction banking message, the rewards are significant. Global transaction banking, with its more stable and consistent revenue profile and relatively lower risk, is being seen as a welcome counter to more volatile investment banking revenue.
Transaction banking has the added benefit of attracting deposits from corporate customers; this reduces reliance on more expensive inter-bank funding. As a fee-based business, transaction banking is also attractive as, under Basel III rules, it does not require expensive capital support. Because of these factors, transaction banking has emerged as an anchor service within the wider banking offering.
But if the services are largely the same, the integration of these services on robust and highly functional platforms has led to a leap in quality and in the level of insight provided to internationally trading corporate clients.
Take cash management. The corporate treasurer needs constantly maximise the availability and application of cash balances as well as minimising liquidity risk. To that end, and particularly in an international trading context, the treasurer needs to have the widest possible visibility on internal cash balances, with rolling cash forecasts on a divisional and group basis, across geographic locations and currencies. There must also be real-time control of cash mobilization – both payments and investments.
The transaction banking platform aims to give the corporate treasurer full visibility over the existing cash position as well as future sources and applications of cash; to trigger cash concentration and pooling, as well as give control over timely deployment of cash in the event of any liquidity needs. The bank must also provide suitable investment options for surplus cash.
Ironically, the pursuit of efficiency in cash management has meant that corporate treasurers are increasingly likely to streamline their bank relationships and associated deposits towards fewer suppliers of larger scale and reach. Meanwhile, the transaction bank needs to have as wide banking network as feasible in order to provide diverse sources of funding and a range of counterparties to control concentration risk.
The inevitable result is that only a handful of suppliers will be capable of a truly global offering. For the rest, the answer lies in increasingly large correspondent banking relationships.
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