A Paradigm Shift in Transaction Banking
A number of industry trends are currently coming together to significantly change the transaction banking landscape. Several of the most prominent of these can be viewed as representing different levels of integration within the industry landscape – corporates are taking a more holistic approach to liquidity and cash management, as well as to relationships with key counterparties. Banks, on the other hand, are internally leveraging synergies to deliver more integrated services that better match client needs. Alongside these developments, the regulatory landscape is also changing in a way that is positively promoting the growth of harmonisation and shared industry standards.
Changing attitudes and dispositions within both banks and corporates are leading to a range of issues that corporate treasuries face – for example, liquidity, risk management, information and reporting – being reconceptualised more holistically in terms of ‘receivables management’. Framing corporate needs in such a way allows all parties to address them in a more integrated fashion rather than, for example, shifting a problem from one side of the supply chain to another or alleviating a liquidity issue which then creates difficulties in terms of risk.
From a corporate perspective, the focus on the financial supply chain (FSC) – something that originally represented a genuine paradigm shift in thinking in transaction banking – is now giving way to an even more integrated approach that encompasses the treasury staples of liquidity and risk, yet also takes into account automation and straight-through-processing (STP), information and reporting, interfacing between corporate and bank systems and, more broadly, overall business sustainability.
With respect to this idea of business sustainability, many corporates – particularly the largest multinational corporations (MNCs) – are growing increasingly concerned about the wellbeing and viability of suppliers, and how the failure of a key trading partner might affect their own ability to continue undertaking business without disruption. In this respect, they are now paying more attention to the mechanics of their trade value chains and are increasingly putting in place solutions that seek to relieve pressure on suppliers and escape the zero-sum game that formerly characterised buyer-supplier relations.
While we can easily point to specific solutions and initiatives being put in place by corporates in this area – such as supplier finance and invoice discounting deals that leverage arbitrage opportunities between buyers’ and suppliers’ respective credit standings – there is certainly a feeling that this new approach represents more that a mere tactical change in the structuring of FSCs. Indeed, escaping the old confrontational logic of the supply chain is proving to be a liberating experience for many corporates and banks, as co-operation and continuity become the new watchwords in this space.
This partnership approach to working with key counterparties is going even further in many of the largest corporates. Some MNCs, for example, are now working closely with existing trading partners when entering new markets, ensuring that suppliers move with them in order to guarantee not only continuity, but also consistency of supply. In this respect, globalisation has not produced the interchangeability of suppliers that some predicted – instead, many corporates are harnessing new financing techniques and the tools of the information age to develop closer links with tried-and-tested existing partners.
The change in attitudes towards supply chain and cash management is leading to the treasury and procurement roles growing in importance in many organisations, with executives of this type now working together more closely. Indeed, this reflects how contemporary approaches to payables and receivables management cut across traditional areas of responsibility – something that is also apparent within many providers of transactions banking services.
From the perspective of banks, changes in internal structure and the routes through which services are delivered to clients are also beginning to take shape. The most obvious of these – the blurring of the lines between cash management and trade finance – has been apparent for some time. However, within universal providers such as Deutsche Bank, this is now beginning to give way to a more comprehensive search for synergies between different areas. There are several such initiatives currently underway within Deutsche Bank, with the goal being the provision of a fully integrated suite of services that reduces complexity and improves efficiency across a treasurer’s entire value chain and allows them to manage their end-to-end workflow through a single platform.
Alongside this drive towards greater integration, banks are also striving to improve the usability of their electronic platforms and systems as part of broader efforts to enhance the experience of clients’ interaction with the bank. In this respect, transaction banking practitioners have much to learn from their retail banking colleagues – as well as other consumer-facing sectors – where intuitive user interfaces that mask sophisticated infrastructure and processes have become the norm.
As well as these and other efforts to improve the client experience, banks are also seeking to develop new communication channels and models of interaction that offer customers a greater say in how solutions are structured and built. One such effort from Deutsche Bank involves a secure platform that will afford clients the opportunity to discuss industry trends and share ideas with the bank.
Of course, while transaction banking has fared relatively well, the past several years have not been particularly kind to the banking industry as whole and there are a range of issues – presenting both opportunities and threats – that providers now have to deal with. For instance, the idea that large corporates might want to only deal with a single global banking provider has now passed; corporates (and financial institutions) are understandably reluctant to put all their eggs in one basket and are much more likely to want to deal with a range of providers. Indeed, the scrutiny of balance sheets is now much more a two-way process, with corporates taking a more pronounced interest in the financial health of their banking partners.
One consequence of corporates seeking to deal with multiple providers is the need for greater standardisation in interfacing. Shared industry standards and protocols are therefore likely to grow in popularity, and while this should contribute towards lowering costs in the medium to long-term, it will also remove a level of differentiation between providers. The SWIFT Trade Services Utility (TSU) is one example of progress in this area, as is the broadening of corporate access to the SWIFT network itself – although, due to questions of economic viability, this still only remains a realistic option for the largest of corporates.
In light of these and other developments shaping the transaction banking landscape, global providers are realising that they can’t be all things to all clients. While on-the-ground presence and local expertise means that services can be provided directly to clients in some markets, assisting local partners in providing them to their own client set will certainly be the way forward in others.
The landscape has certainly changed in the wake of recent economic instability, yet most of the trends discussed above were already well underway before the crisis struck. For example, while corporates now clearly have a greater awareness of the perils of counterparty risk and purely reactive liquidity management, attitudes towards these areas were already changing, thanks to the shift away from traditional means of trade risk mitigation towards open account that has been apparent for some time.
However, the industry certainly needs to look at how liquidity can be better delivered to small and mid-cap business. While MNCs have largely recovered from the credit crunch and subsequent downturn, problems persist for many smaller players. In this respect, making the types of techniques and approaches described above available to a broader range of clients should be a priority and would certainly assist them should problems of the type experienced in recent years return.
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