Corporate Transaction Banking: Can Banks Raise their Game?
As a result of the 2008 financial crisis – and the consequent tightening of regulation on liquidity and capital rules such as Basel III – banks’ appetite for asset-based revenue has been decreasing. In some pockets of the market – especially for large corporates that can access any type of investors – this has resulted in institutional investors, such as hedge funds and private equity groups, gaining substantial market share via leveraged buyouts (LBOs), asset finance and other means.
Consequently when balance sheet business leaves the banking industry, only transactions remain. This leads to corporate banking mainly being made up of transaction banking, or at least that part of transaction banking left to the banking industry.
From corporates’ point of view, this has been reflected in the need to focus more closely on liquidity and cash flow and by increasing operational efficiencies, with a primary focus on developing better accounts receivable (AR) processes, which result in improved cash and risk positions.
The difficult economic conditions resulting from the credit squeeze of the past decade have, in fact, had profound consequences for the daily operations of companies. Faced with reduced availability of liquidity from external sources, companies have started looking inside their organisations and sourcing additional liquidity internally.
Large international corporations, for example, have invested into programmes aimed at increasingly centralising all cash that was previously held in local branches or business units; rationalising their bank relationship, with the growing need to autonomously open and close accounts to facilitate lending and investments.
In general, companies of all sizes have sought to streamline cash management, accounting, reconciliation and reporting services, in a constant search for speed, ease of use, transparency and interactivity of payments products, channels and processes. This is not only to cope with volatile international economic conditions, but also to comply with a complex regulatory environment, increasing competition and – not least – to meet the rapidly changing expectations and spending habits of consumers.
This means that corporates will choose their transaction banking partners according to the following criteria:
To address the corporate business segment competitively, banks should review their corporate transaction strategy. In doing so they can start by leveraging those historical aspects of their business, which are still the basis of today’s transaction banking – security and transparency of payments and data; compliance to regulation; and commitment to this service for corporates.
In addition to these elements, banks should then shape and differentiate their presence in this market by addressing three main topics:
1. Strategic positioning (choice of client segments, geographies and offerings prioritisation):
Client expectations differ for each segment, making it difficult for banks to satisfy all needs simultaneously. They should therefore try to create synergies in their offerings, by focusing on products and services which could be sold to business clients in various segments and which could have value-added services when customising for a specific segment.
For example, certain needs are common to all corporate customer segments such as those relating to quality and reliability of payments processing; security of payments and related data; and competitiveness. Each can be reflected in real-time execution, or competitive pricing based on straight-through processing (STP) processing and a high volume of transactions.
At the other end, banks wishing to attract specific segments should prioritise their offerings and create cross-selling opportunities. Both large international corporate and mid-caps require advanced liquidity management services, characterised by state-of-the-art technologies and products (cash pooling, FX services), account management and information services. Financial institutions (FIs) could also benefit from a comprehensive liquidity management offering.
Additionally, the selection of geographies (as well as prioritisation of the offerings) should be based on growth potential and volumes. For example, regions such as sub-Saharan Africa, with its flourishing economic environment, provides corporates with significant opportunities for trade and investment (mainly in the commodities and consumer goods sector*) , or Asia Pacific, where economic growth and increasing business sophistication are driving the expansion of Asian transaction banking. Main drivers include the development in intra-Asian trade, now 24% of global trade, and the opening of new trade corridors with Latin America and China.
2. IT investments (flexible and state-of-the-art platforms/architectures, including partnering possibilities):
To meet the demands of corporate customers, banks should start investing in open and flexible architectures. These should allow them to respond swiftly to any change in their business needs, catering for innovation (including value-added services), security, transparency and state-of-the-art integration among channels, currencies, formats and standards.
In the wake of increasing compliance, shrinking margins and evolving customer demands, back-office and processes digitisation can become a major lever to improving productivity and reducing costs for banks. In payments acquisition, for example, investments in the order management layer are targeted to optimise the client experience, using different channels to initiate payments, orchestrating processing towards the right execution engine and delivering a single experience while guaranteeing a short time to market.
Additionally, since typically IT investments are huge for banks, they could consider looking for partners to facilitate the integration into the physical supply chain through e-invoicing and ease its most articulated aspects, such as reconciliation, accounting and reporting.
3. Innovation and value added services:
Given that pure transactions in this business are nowadays a commodity, the capability to manage high volumes of transactions allows banks to enter the market but keep a competitive position in the corporate transaction banking space, and they should look for differentiators in their offerings.
An example could be business-to-business (B2B) mobile banking, whereby corporates are seeking the chance to make and approve payments, deposit cheques via mobile, monitor accounts, and view reports. Some major banks have already begun to refine corporate mobile applications. RBS’ AccessMobile and Wells Fargo’s CEO Mobile are examples of relatively sophisticated offerings. Deutsche Bank’s Autobahn platform recently expanded its electronic foreign exchange (FX) trading functionality to incorporate smart phones and tablets**.
In addition, the offering of corporate virtual accounts could be an enabler of value-added services in the context of reconciliation, reporting and payments collection models. Combined with payment and collection factories, and specifically in the context of the single euro payments area (SEPA), virtual account structures help by providing one collection account per legal entity, separate virtual accounts for each line of business and individual account statements and online access for each virtual account.
With such an added-value service, companies could improve cash flow and turnaround time for reconciliation, simplify banking relationships, enhance their credit control and consequently lower credit risk. In Europe, Barclays offers virtual account management to its corporate clients as part of its online banking services, while Deutsche Bank, in partnership with IBM is offering to both FIs and corporate clients ‘virtual accounts’ in addition to its internet offering.
Moreover, virtual account structures could be used by banks as a ‘vehicle’ to provide information in support of the corporate business, targeting clients in an increasingly customised way. Deutsche Bank’s Autobahn app Market is an example of how electronic products across business divisions and asset classes can be combined into one integrated offering, adaptable to the corporate’s business needs such as tracking performance and mitigating risk while streamlining daily workflows, increasing productivity and maximising returns.
Last, but not least, increasing demand for real-time payments from corporates and their customers offers a major opportunity for banks to re-tool their offerings and concretely match the benefits of real time payments (such as improved visibility and control on cash flows, and improved working capital due to the availability of funds in real time).
To summarise, the market will fragment further between global scale players such as Citi providing services across 50+ countries, covering all products range and delivering state-of-the-art and reliable services at competitive prices, and niche players building on specific geographical or industry knowledge to design and deliver innovative value added services which corporate will be willing and ready to pay for.
An example of these niche players can be found in Ecobank Group, which has chosen Africa as its geographic focus. In a relatively short time, it was able to build a franchise building on in-depth knowledge of business and payments/collection in key African markets.
*Commerzbank study 2014, ‘Renaissance in Sub-Saharan Africa’
**The Future of Corporate Payments (Payments Innovation Alliance white paper)