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Once thought of as investment banking's less glamorous sibling, transaction banking is now a rising star in the global financial services industry.
In the wake of market fluctuations, low interest rates and job cuts in investment banking, transaction banking offers stable revenue growth.
According to the Financial Times, the revenue difference between the worst and best years for transaction banking is 11%, as compared to 19% for investment banking and 23% for fixed income and equities.
In 2016, banks made US$209 billion from transaction banking, compared with the US$172 billion from the trading divisions. This was also triple the US$77 billion banks made on M&A and corporate advisory. Transaction services is also ahead of lending revenues for every year since 2011.
However, despite its strong growth, transaction banking has yet to reach its full potential.
Globalization is one of the main engines fueling the rise of transaction banking yet it is also its main challenge.
Global trade has introduced new opportunities for corporations to do business and transact across borders. Yet transaction banks are struggling to keep pace with the rapid and radical shifts in geopolitics and demographics - the very elements that can help the business flourish or languish.
Innovative and new platform-based services have also increased pace of cross-border trading. Companies like Alibaba and Amazon have disintermediated many layers of global trade by linking producers to consumers directly and expedited the physical movement of goods, thanks to modern-day logistics.
However, traditional banking models have yet to keep up. Interoperability becomes an issue with increased globalization. For example, there are 19 distinct separate faster payment networks around the world, but none are inter-operable.
These new global trade models will need next generation transaction banking products and services, expansive cash or liquidity services and faster payment processing spanning multiple jurisdictions and exotic currencies.
Globalization has also given rise to cross-border small and medium enterprises (SMEs). These companies account for much of the intermediate trade in industry supply chains and are the key economic drivers of emerging economies. As they expand their reach domestically and regionally, more cross-border SME transactions are taking place.
The rise of Asia as the largest global market for transaction banking is also driving the field eastward. Asian treasuries are going global with bigger operations and more complex needs.
China's emergence as a mega-trader is a major driver of this: Chinese corporations are expanding into Africa and Europe, and they've increased bilateral trade partnerships with other countries in Asia. As a result, corporate treasurers need to cope with an increase of renminbi transactions worldwide.
At the same time, global companies are rationalizing their banking relationships to achieve reduced costs, greater control & visibility. Companies are realizing that they have too many banking relationships after many years of organic and inorganic growth.
Transaction banking thus needs to become region-specific. A McKinsey report on transaction banking in Asia indicates that, increasingly, domestic customers want solutions in sophisticated liquidity management, pooling and sweeping, as well as consumer-to-business integration.
The larger European banks frequently do not have the network to access these regional markets. At the same time, many local banks have much catching up to do with legacy, home-grown systems that aren't very flexible.
Transaction bankers are aware of the changing global dynamics and aspire to transform how the business is run.
JP Morgan's investment bank head, Daniel Pinto, is reportedly keen to transform transaction banking with a 12% rise in the treasury services technology budget and a 30% increase in technology spend for custody and fund services.
Banks need a unified core transaction processing platform that can deal with multiple currencies and cash pools, as well as support end-to-end payments and trade management systems.
In the long term, an integrated data platform improves the quality of client data and improves pricing and reporting capabilities.
There is also the additional demand of regulatory compliance in both foreign and home markets. Regulation can help remove trade barriers but can also impose additional operational and compliance costs.
The fastest way to overcome this is to digitize compliance with centralized data. KYC (Know Your Customer) registries, automated sanctions checks and digitalizing compliance-related documentation will help banks fulfil their compliance requirements faster and at a lower cost.
As transactions become more complex, transaction banks need to deal with new technologies such as blockchain and distributive ledgers. Banks also need new specialized talent in areas such as data science, cybersecurity, and supply chain finance.
At the same time, financial technology companies or fintechs are snapping at the heels of traditional transaction bankers, with agile and relevant solutions that respond to current needs.
To keep up, some banks have started recruiting talent from leading technology firms like Google. This allows greater tech adoption in digitizing supply chain finance, and achieving completely paperless processes integrated with the cash management platform.
Corporate clients increasingly want a BYOD (Bring Your Own Device) approach with remote access and payment tracking and transaction banks need to support that.
Technology-driven solutions for mid-corporate and SME customers can also help banks service this growing segment more effectively with working capital and investment management portals, integrated cash management and a down-market version of enterprise resource planning integration.
With its stable returns in a volatile economy, transaction banking is truly a rising star in the banking industry.
However, with globalization changing international trade patterns and technology evolving at breakneck speed, transaction bankers need to ensure that they have the right technology partners to support their growth.