The changing face of transaction banking

The growing importance of transaction banking in the corporate space stems from the need for corporates to manage working capital, liquidity and risk more efficiently. These organisations are seeking end-to-end cash management solutions that can better manage pools of liquidity in multiple regions, which transaction banks can provide.

Since the financial crisis, corporates have become more aware of the counterparty risk linked to banks and their choice of transaction bank is now based on a more selective, relationship-centric approach.

Three types of banks service the transaction banking market: the big bracket, global players; regional banks; and purely domestically focused banks. The divisions between these categories are often blurred, for example, as some regional banks will provide strong domestic offerings in their markets of choice.

In order to provide end-to-end solutions, transaction banks must make heavy investments in technology to ensure systems are integrated and become more digital in order to deliver standardised and harmonised reporting and liquidity management to clients. Investment in security is also a top priority as cash management services move towards new frontiers such as real-time payments and mobile banking.

Transaction banks are required to provide traditional cash management and working capital products alongside new, value-added services such as foreign exchange and interest rate hedging, supply chain finance, factoring and securitisation. This is a challenge for transaction banks, particularly those that serve large multinational corporate clients who rely on their banks to provide efficient and safe cash management services across their international network.

While integrating trade finance and receivables solutions is relatively straightforward, integration of cash management services is challenging. These services are tightly linked to local clearing and payment systems, which have different reporting and regulatory requirements. This affects the ability to integrate cash pooling in these environments.

In order to help corporate clients to efficiently manage working capital and liquidity across all of their markets, transaction banks will increasingly partner with each other to provide bundled solutions that deliver the geographic coverage many firms require. Such partnerships will combine expertise in particular markets to provide in-depth services.

The evolving landscape of corporate banking has attracted the attention of non-bank competitors; new entrants are competing in parts of the value chain and internet-based entrants are disrupting the value chain. However, there is a greater prospect that transaction banks can collaborate with new entrants, embedding their solutions into the overall cash management and trade offering in order to provide the very best solutions for corporate clients. Partnerships with non-banks have the potential to deliver faster and more cost effective services to some parts of the value chain. Overall, transaction banks have an advantage in addressing the entire value chain and also being able to make the significant investment required to offer holistic cash management and trade services whilst guaranteeing safety.