As Transaction Banking Gets Crowded, How Can Banks Stand Out?

This article originally appeared on Forbes.com.

Many banks and fintechs want a greater presence in transaction banking—the business of managing cash for companies and financing trade and supply chains. Global banks are trying to add more sources of recurring fee income to increase their return on capital. Local and regional banks in emerging markets long for the relative stability of transaction banking, as they face compressing profit margins and higher capital requirements in traditional corporate lending. Competition is growing from technology companies as well. Kantox, for instance, has expanded from foreign currency hedging to cash management and risk management, serving more than 2,000 clients worldwide.

RELATED INSIGHTS

Coping with the Challenge of Open BankingDisruption Ahead for Transaction BankingFour Models to Weather the Turbulence in Banking

INDUSTRY EXPERTISE

Financial ServicesBanking

The widespread optimism about this business needs to be tempered, however. For one thing, banks are chasing the same pool of revenues. Moreover, as new digital technologies automate the manual, paper-intensive processes involved, costs will decline. That dynamic, combined with heightened competition, is likely to cause a structural decline in prices for cross-border payments and trade finance.

Bain & Company estimates that distributed ledger technology, if adopted in the right way by all participants in the trade ecosystem, has the potential to reduce trade finance operating costs by 50% to 80%, and to realize three- to fourfold improvements in turnaround times, depending on the trade finance product involved. We have already seen prices decline in the SWIFT international payment network.

With so many banks forecasting market share gains, new digital technologies reducing costs and pricing set to decline, the numbers just don’t add up for everyone. To succeed in transaction banking, individual banks likely will need to overhaul most aspects of their operating models. Too many banks are saddled with payments and other core functionality embedded in legacy IT systems. Their operations often still depend on largely paper-based processes, and will need retooling.

Banks also struggle to attract new types of talent—not people who know the intricacies of SWIFT protocols and paperwork management, but employees conversant with artificial intelligence, distributed ledger technology or design of convenient user interfaces.

Furthermore, given how trade and supply chain finance increasingly involve ecosystems of external partners, banks will have to step up their ability to work with companies that operate with a much faster metabolic rate.

Rethinking the role of the bank


Forward-looking banks do have an opportunity to jump ahead, by rethinking their role in transaction banking—specifically, how they will add value and how to charge for it. With pricing pressure imminent, they should consider charging not per payment or other item, but rather through a fee for a solution that includes transactions, data analytics, security features, a portal connecting the client with other banks, and more.

Some banks will turn to partnerships—with IT firms, other banks, e-commerce platforms and others—to provide a complete transaction banking solution to clients. Others will provide the infrastructure for local payments and collections, or become utilities for processing certain transactions in certain countries or regions. This will require banks to experiment with new economic models, from simple revenue sharing to sharing of the customer relationship.

As transaction banking evolves, senior bank leaders should take several steps:

  • Understand the biggest sources of disruption and their effects on market structure and profit pools.
  • Define the bank’s role in the ecosystem and its sources of differentiation, rather than trying to be everything to everyone.
  • Define an effective operating model, including the most important capabilities.
  • Restructure the technology stack to deliver a simpler, less expensive customer experience.
  • Source the required talent supply to accelerate investment in technology and analytics.
  • Cultivate the right partnership models, whether with other banks or external ecosystems.

Transaction banking is an alluring market. But as it gets more crowded and technology drives down marginal costs, prices are bound to fall, leaving many banks disappointed or vulnerable to losses. Banks that are slow to modernize will likely wind up on the wrong side of the competition. Those that move aggressively now to redesign their operating models and carve out a differentiated role will raise the odds of securing a strong position for years to come.

Thomas Olsen, Ada Di Marzo and Sen Ganesh are partners with Bain & Company’s Financial Services practice.