By Joost Bergen, Founder, Cash Dynamics & Transaction Banking Lead at Alpha Development
Transaction banking sits at the heart of the relationship between a bank and its clients’ operational processes of payments, receivables, and liquidity. It serves two important purposes:
– Clients use transaction banking to manage risk while optimising working capital as a whole; and
– For a bank, transaction banking represents one of the most important contributions to its balance sheet; a strong balance sheet supports the bank’s lending business.
Central to transaction banking is the development of a relationship between a bank and its clients based on two core services:
– To enable its clients to manage their operational processes and mitigate the associated risks (e.g., currency and commodity price volatility, and the risk of late and non-payment/ delivery), and to provide the ability to pay suppliers, employees and governments and to collect funds from customers; and
– To provide account data for reconciliation and accounting purposes and to enable its clients to manage their liquidity positions (via flows through bank-supplied accounts in potentially different currencies) and the ability to hold these funds securely.
Clients may use several transaction banks to support their business, depending on their size, countries of operation and own approach to bank relationship management.
This core relationship between a bank and its clients is the foundation on which wider client relationships can be built.
Transaction banks can leverage that relationship and offer a range of other services, including:
– Lending to clients, in a variety of forms, such as overdrafts, lines of credit and revolvers, asset-based lending, and participation in longer-term syndicated loans;
– Trade services, such as letters of credit and guarantees, to mitigate counterparty risk (some banks offer trade services via its transaction bank);
– Support for financial risk management, including access to interest rate, FX and commodity price hedging instruments.
– General relationship management advice to support the client implement their business strategy, and
– The provision and implementation of technology solutions to help clients improve their operational efficiency.
Transaction banks partner with financial technology companies to bring value beyond traditional banking:
– To deliver digital services, enabling their clients to optimise their use of working capital via products such as virtual accounts, asset-based finance and supplier finance solutions; and
– To improve access to the vast range of financial data, giving clients the visibility over cash and risk necessary to make effective strategic business decisions. Corporate leaders are increasingly focusing on liquidity management, alongside revenues and profitability.
As the foundation of the core client relationship, if a bank gets its transaction banking relationship right, it will build trust and reliance with the client, and other business will follow.
From the bank’s perspective, the transaction banking relationship represents the most important source of funding for the bank’s own balance sheet. Clients rely on their transaction banks to provide the most critical services; consequently, client transaction banking accounts represent the most stable funding for the bank – as unsecured wholesale funding. Moreover, by offering data analytic tools and meeting clients’ payments and risk management requirements, banks have good visibility themselves over the likely client balances over a forecastable period, easing the task of balance sheet management.
Because of the critical importance of transaction banking, banks need to invest in:
– Technology, whether independently or in partnership, to ensure they can offer cutting edge solutions to their corporate clients in real-time and in a secure manner; and
– Their people, so they can develop existing client relationships into true partnerships on which their clients rely.
The transaction banking value proposition Transaction banking supports the operational processes along their clients’ financial supply chains, often across multiple jurisdictions, through a range of solutions, including:
– Balance sheet management, by providing lending when required;
– Payment services, to enable clients to pay and collect funds;
– Bank account management, by providing access to bank account information for reconciliation, accounting and liquidity purposes (in some cases, particularly for liquidity, via real-time data exchange);
– Financial risk (FX, interest rate and commodity price) mitigation to help clients manage their profitability; and
– Seamless access to all bank services aligned to the clients’ own management control frameworks.
– represents their most important funding source, in the form of stable deposits, which enable them to achieve their own financial objectives, without being too reliant on the capital markets; and
– provides a continuous link and means of interaction with their clients enabling the cross sale of other services through the building of these relationships.
To be successful, transaction bankers require a different skill set compared to more traditional, lending-focused colleagues.
Notably, transaction bankers rely on soft skills; communication with clients is critical to develop relationships and to understand clients’ needs. Transaction bankers also need to be problem-solvers; they need to harness their knowledge of technology and the potential uses of data to develop solutions to solve their clients’ problems, within the framework of the banks own balance sheet.
In case you missed it – check out our Challenges of Transaction Banking video snapshots here.
