Cash-in on Competitive Advantage in a Commoditized Marketplace
The performance expectations around the transaction banking businesses have not changed during the past few years and the ‘stability of revenue’ play is being challenged by other banking businesses that year on year are producing healthy, predictable and – importantly – growing contributions to the bottom line. As a result, transaction banking is faced with the need to vigorously reposition itself as a growth business rearticulating the value proposition to the wider enterprise. This is the intense world of internal competition and the exciting challenge of bidding for capital and resources against dynamic businesses such as global markets and asset management, etc. Transaction banking remains a business area that is worth fighting for as it represents a pivotal and predictable revenue generator as well as an important asset. However, its success or failure depends on overcoming the perception that it is commoditized and by reclaiming its rightful place as a core business.
The market’s regulatory framework is undergoing a transformation. In Europe, the single European payments area (SEPA) is causing seismic shifts in thinking at banks, as they review their payment propositions for retail and wholesale client segments. Industry initiatives, spearheaded by SWIFT, in the channel management and trade arenas as well as a stronger call for message standardization are also converging factors demanding a rethink of this ‘commoditized’ business proposition. For the corporate franchise a number of institutions are undertaking the evaluation as a collaborative effort between the cash and trade product lines to respond to clients buying a more tightly-knit package of capabilities.
The implications of SEPA are more widespread than has been acknowledged. Network banks will be forced to look at their branch structure and dimension. A forward-looking architecture will collapse banks’ physical presence into a stronger consolidated delivery model. Even today, some of the perceived heavyweights in the business are seeing new regional entrants with aspirations to make claims over their territory. Banks are also struggling with their investment strategies to keep up with the game and are recognizing that while technology commitment can be a business enabler, the resulting costs can be an inhibitor to change. At the same time, uncertainty prevails across much of the industry as difficult discussions have progressed with banks feeling the pressure to provide answers to challenging questions. They must effectively deliberate and confirm whether they will follow a tortuous strategy towards rich functional product excellence or play the scale game.
One of the most exciting recent developments in the transaction banking arena has been the shift in the assessment of the traditional trade business. Spurred on by the need to reengineer a paper-driven risk activity and broaden supply chain offerings, there are emerging opportunities for banks to obtain competitive advantage leveraging the new Trade Services Utility (TSU) launched by SWIFT.
While TSU is currently in the pilot stage, it will eventually enable banks to offer finance and risk intermediation services, extend in-sourcing of receivables and payables propositions in addition to enabling banks to highlight their critical role in providing information services. This development will further drive the convergence of cash and trade businesses as the distinction between payments and documentary business will be blurred through a growing non-documentary commercial payments need. Importantly, the new emerging collaboration model, with SWIFT providing an infrastructure to enable banks to enter the corporate supply chain, immediately opens up new growth and new revenue streams for banks that have struggled to see major differentiation in this business for many decades.
Encouragingly, the demand for risk expertise across a multitude of commercial variables is also providing growth opportunities for banks committed to cash and trade transaction banking. These banks, with their deep involvement in managing the commercial support and settlement services, are well placed to provide advisory services around foreign exchange, interest rate and commodity risk structuring proposals. Contradictory as it may seem, there is a visible and growing element of deal structuring prevalent within the scale-driven transaction business – a clear indication that banks can tailor their responses to client needs and challenge traditional theory that scale and price are the only key variables for competitive differentiation.
To succeed in the new world, banks will be required to far better understand their clients’ needs and build a more integrated model of their own potential value proposition that moves away from a vertical delineation between cash and trade. The successful organizations will be segmenting their customer bases more precisely to identify growth wallets and strengthen an aligned selling proposition that looks at supply chain activity, commencing with the purchase order and electronic invoicing, moving into dematerializing data checking, providing risk management services, supported by the provision of short term credit and ending with payment settlement and potentially, cash investments. This is the emerging vision around a compelling integrated product proposition. This more holistic selling proposition is already visible in the financial institutions market through a re-emerging white labelling interest. A handful of large network banks are rediscovering the value proposition of their geographical footprint and leveraging this to a new client base.
Market consolidation, compromised technology budgets and demanding clients are forcing a number of mid-sized banks to see how they can quickly improve the level of services they provide to their corporate clients by approaching these network banks. The latter are offering a suite of capabilities – geographical coverage, browser-based front-end systems, a multitude of payments capabilities, netting and liquidity management products. As the understanding of end-client needs develops we are also seeing emerging requests for a combined offering from provider banks to cover both cash and trade services. It is the fuller proposition that buyer banks are leveraging. White labelling is becoming a de-facto platform for partnership, enabling institutions to concentrate on building their client franchises, growing business and a revenue trajectory. Here is another demonstrable challenge to the myriad of reasons why there is no other ‘game in town’ than focusing on managing the complexity of the external environment.
Corporates are gaining a stronger voice. Their views are being actively solicited and channelled into the transaction banking industry. A stronger call for interoperability and standardization is being viewed by many banks as a way of creating a level playing field and minimizing switching costs, a threatening development. However, this is not the view that many large corporations maintain. Recognition of the key competencies around transaction processing prevails as well as an understanding of the implications in committing to reengineering these platforms.
Banks can squabble about lack of differentiation and commoditization of the industry but where is the innovation? Where is the thrust to develop new services and products? How are banks leveraging existing capabilities? Banks should feel more empowered in extracting value from within the enterprise, capitalizing on existing product capability as well as the compelling relationship dimension that exists between corporations and banks.
There have only been a handful of banks that recognize that depth of knowledge, robust technology, breadth of capabilities and keeping clients’ needs at the forefront of efforts are necessary across multiple functions to build a powerful transaction banking platform. This understanding of competency has been pivotal in reviewing strategic decisions around ‘smart-sourcing’ and outsourcing as well as recognizing differentiating points in its business model. This starts with the knowledge that clients reward local client service teams, a geographical footprint is a key competitive advantage as well as recognizing that major technology commitment is needed to transform its business.