By Joost Bergen, Founder, Cash Dynamics; Transaction Banking Lead at Alpha Development
Transaction banking plays an important role in the economy by acting as the central link between:
Suppliers | Sellers and Buyers | Clients who need to settle commercial transactions with monetary value
Yet the unstoppable development of financial technology (FinTechs) suggests that transaction banks face disintermediation, putting the concept of the core transaction banking relationship under threat.
Is the Transaction Banking Business model getting obsolete, is this risk of disintermediation real and, if so, what can transaction banks do to protect themselves for these threats?
Transaction banking is at the core of the relationship between banks and their clients, benefitting all parties:
There is no doubt that transaction banking is changing for both corporate and institutional clients, in the form of a rapid move towards automation across the full range of core activities, from payments and FX management to investment.
Much of the change is enabled by Financial Technology, developed by established “BigTechs”, as well as newer “Fintechs”. It is this high adoption of non-bank developed technology that suggests transaction banks are at risk of disintermediation and losing their relevancy.
Despite the growing importance of technology, transaction banking continues to play an important role in the economy, and in society as a whole.
Critically, to be able to provide transaction banking services, holding a specific licence to operate is a prerequisite. Banks are licensed to provide a wide range of services; FinTechs, generally, are not.
This is perhaps one reason why there is a significant degree of collaboration between licensed entities/ banks and FinTechs, which, in itself, decreases the risk of disintermediation.
Yet, this does not mean transaction banks can ignore the FinTech threat completely.
They need to reappraise their business models, both internally and externally. They need to refocus on their current client base and, therefore, revenues and ratio’s. At the same time, they need to rebuild their technical infrastructure and retire legacy system to future-proof their organisations to meet future expectations.
Changes in expectation of the banking industry are being driven by consumer and company behaviour.
We have seen how innovation which started in the retail domain has moved to the commercial and corporate transaction banking ecosystem. This innovation is centred on data; not just as a “dashboard” visualising data, but also as a tool to access and use that data in a close-to-real time manner.
The change in consumer banking raises important questions for transaction banks looking to service their corporate clients in future:
Banks, and specifically transaction banks, are trusted by their clients, who use bank-provided technology platforms to supply the data used to populate their own internal systems, from the ERP to the general ledger to support reconciliation, accounting, and decision-making process. Those clients will not abandon their banking partners while they still rely on banks for their daily financial operations and reporting.
The flexibility that FinTechs enjoy is both a blessing and a curse.
FinTechs can respond quickly to changing market conditions (pivot) in a way that highly regulated, complex institutions, like banks, cannot. Fintechs understand the value their technology can bring, whether to operational efficiency or risk mitigation. But this flexibility also means that many FinTechs emerge and then disappear very quickly, a major disadvantage to potential clients who value reliability and commitment. Those that survive often end up being regulated. Some are bought by financial institutions; others obtain a licence allowing them to provide financial services in their own name. Either way, by being regulated, these FinTechs end up losing the very flexibility that made them a threat in the first place.
As they continue to develop their strategies for the future, transaction banks have to harness their advantages. They are licensed entities, built on robust compliance, risk and balance sheet management capabilities, with strong, trusted relationships with their clients.
But transaction banks must also recognise where they have to change. They need to develop a culture that is able to adapt to technological change and the growing importance of data use. They need become agile to bring new services and solutions to market quickly; to do so means retiring legacy technology and building new platforms and “plumbing” to prepare for the future. The good news is that they don’t have to go it alone. They can partner with FinTechs to offer these broad and integrated solutions.
Clients want help to manage these changes too. Their role within their organisations makes them risk-averse. Yet, they know they need to use technology to get insights from data; they just don’t know how to best to do so. They are willing to pay for support and banks are in a strong position of trust to help them.
Fundamentally, all parties, both banks and their clients, know that future solutions need to be provided in a cloud environment, in a way that is cybersecure, while meeting changing regulatory requirements. It means transaction banks need to change culture, to empower their people to attain the right skills to operate in this emerging environment, in a way that reassures and adds value to their clients. This means training their people to recognise the challenges of the new real-time digital world, and understand how technology can make their clients’ lives easier with less risk, liquidity and more control.
By investing in their people to understand the opportunities technology offers, transaction banks will enhance and deepen the relationships they have with their clients. An investment in people now will protect revenues today, and strengthen tomorrow’s EBIT.
For further insight and actionable tactics for success in Transaction Banking, make sure you download our ebook: Telling Your Transaction Banking Story
