Since the financial crisis, banks have actively sought to make up lost revenues from mortgages, derivatives and other risky lending. The challenge has been to find new revenue streams which provide the opportunities for growth and management of risk. One of the key areas that meet these criteria is Transaction Banking. Over the last few years, Transaction Banking has become a key profit driver for many institutions. There are widespread expectations of increased revenues and cost synergies.
Transaction Banking defined
So, what is Transaction Banking? I define Transaction Banking as a corporate banking offering that has no retail cross-over. Some vendors believe that they can take a corporate banking product, strip out the onboarding, FX, pooling etc. and – voilà – produce a retail product. I am sorry, but, to my mind, things do not work that way.
I see Transaction Banking as a suite of uniformed products that address the key corporate needs for working capital optimization. That suite of products includes solutions that are designed for corporates and which integrate cash, trade finance, FX and payments.
True Transaction Banking convergence is a challenge which will take time and hard work. The financial services industry struggles with legacy applications, limited resources, internal co-operation (or lack thereof) and, of course, funding. Corporates have already made great progress in operational and logistical efficiencies: this means that CFOs have been able to manage working capital more effectively.
However, with the extension of global supply chains, the financial implications of all this have grown markedly. Corporates understand these implications, and are driving banks to provide a Transaction Banking suite which can benefit them. Currently, the corporates tend to see banks as consisting of separate silos: technology vendors have been regarded as a part of the problem, not the remedy.
I think that there are two key questions. Can banks and vendors deliver on the promise of Transaction Banking rather than stay true to existing silos? How can corporates profit from a seamless banking solution that delivers benefits?
It will take co-operation from both sides to make the shifts that are needed to realize all the potential rewards. Banks need to incorporate the thought processes of corporate CFOs in the design and development of Transaction Banking solutions. Corporates need to have an end-to-end view of all transactions that have an impact on working capital, with all relevant reports centralized in one single place. That single place should be a secure portal with a dashboard which is designed to provide a user-friendly experience.
Of course, the dashboard is just one aspect of a properly conceived Transaction Banking solution. I would suggest that the solution should also provide the following key benefits:
• Initiation of transactions, from which information is fed to cash management (for position forecasting), FX Contracts placement, investment decisions, accounts receivable and accounts payable. In short, a holistic view of working capital should allow the CFO to mitigate risks for the corporation both in its home market and internationally.
• Combination of cash, trade, FX and payment information in both standard reports and user-built reports. This needs to happen in real-time, so that the CFO can see the current position and forecast cash flow effectively.
• An Omni-link approach that will seamlessly connect the many forms of communication available today. This will range from traditional bricks-n-mortar, to on-line, video to NFC, EDI and Twitter to RFID and mobile (smart phones, tablets, wearable devices, etc.)
• Provision of Electronic Bill Presentment and Payment (EBPP) and e-invoicing capabilities that can be based on information from the buyer or the seller. The system should also include processing of Purchase Orders (PO) which matches them to Invoices and other relevant documents.
• Automation of settlement information, in order to carry the PO-Invoice matches into the acknowledgement of payments made by buyers and sellers. This will relive the corporates of the odious work of reconciliation and may actually be a fee-generator.
• Connection with the bank’s FX system, or interface with a provider of real-time FX rate information. FX contract information should also be automated.
• Features such as cash concentration, netting, account sweeps and pooling for liquidity management, which make it easier for corporates to manage working capital.
• Identification of the optimal timing of settlement, taking account of supplier discounts and the earnings potential of company funds. This can take place manually, or in an automated payment processing system.
• A single on-boarding capability that automates compliance screening and due diligence.
Building the right solutions
For the vendors, the challenge is to develop a corporate Transaction Banking solution that can be applied by banks to the needs of all corporate clients – large, medium and small. The solution should enable banks to extend the full range of products and services to small and medium-sized enterprises (SMEs) who play a key role in the supply chains of the banks’ larger corporate clients. Meanwhile, the larger corporate clients need a consolidated single view – and one that incorporates the clients’ dealings with different banks.
In short, the message for vendors is simple: build solutions that the corporates need, and you will have solutions that the banks will buy. Too often, though, the vendors have a blinkered view that the banks are their customers and that the banks will tell the vendors what the banks think that the corporates want. This is true of most vendors because it is the larger customers (i.e. the banks) which pay for the development of new products.
In other words, the vendors opt not to bear the costs and risks of developing new products that meet the needs of the market. They want to be able to claim a position of leadership, but without paying for it. Very few vendors have the imagination to develop a solution that the corporates really need and then tell the banks that the banks should adopt the solution.
A case in point is mobile banking for corporate clients. Banks have focused on retail mobile products and solutions – which produce no income. Meanwhile, very little attention has been given to mobile banking for corporates. This is astonishing, given that corporates – unlike retail customers – will be prepared to pay for the service. The features that a bank can offer to a corporate client are straightforward: however, it is important to differentiate between corporate usages of smart phones as opposed to tablets.
On a smart phone, there are limitations as to what can be done. It is reasonable for a corporate to expect ‘remote approval’ type functions. These include the viewing and approval of payments, payroll and travel expenses, as well as certain other transactions, by executives who are out of the office. In addition, the executives have the ability to view statements, review transactions, perform cash movements and check positions. These functions include alerts and two-way messaging for corporate actions – with a degree of personalization and content ability for both large and SME corporate clients.
So, what else do the corporate customers need from mobile solutions that are delivered by smart phones? I suggest the following:
• Improved user experience.
• Flexible and bi-directional (i.e. bank-to-customer and customer-to-bank) alerting and messaging capability that is linked to the overall dashboard view.
• Support for third party applications for host-to-host transfers.
• Enhanced performance and security with proven capabilities.
• Ease of maintenance that comes from application monitoring by the bank on a real-time basis.
• E-Mail/SMS notification for authorizer, status and administrative changes.
I would also note that the opportunity exists for banks to use different message modes for the cross-selling of complementary bank services, such as the offering of an FX contract or cash pooling.
The tablet offers broader functionality, with fewer limitations as to what may be done. Like a phone, a tablet is expected to provide the ability to view statements, approve transactions, perform payment authorizations and to check positions with alerts and two-way messaging. However, a tablet offers a greater degree of corporate personalization and content management. Corporates expect that full business-to-business transactions can be undertaken on a tablet, in the same way that they would be on a desktop computer. Workflows can take account of the full life cycle of a transaction. It should be possible to collect essential data (e.g. settlement date, amount, currency etc.) from an internal or external system at an earlier stage in the overall process.
Meanwhile, trade finance is largely uncharted territory for mobile banking. Banks hope that corporate clients will use tablets (and, to a lesser extent, smart phones) to enter in applications for imports, exports, stand-by facilities, guarantees and other trade-related transactions. This should enable the banks to broaden corporate relationships and to increase fee income by coordinating corporate transactions.
However, the challenge is that trade is driven by documents which are not all in electronic format at this time. Paper documents are slowly moving to electronic formats, which will boost the value of tablet processing. Once documents have been captured and digitized, images can be accessed by all parties to a transaction. That would give corporations the ability to check the status of pending bills or payments, to know if a transaction has been executed, to view the current and scheduled inflows and outflows of cash, and to adjust funding requirements.
Mobile services can assist trade partners in relation to financing, scheduling, and payments – as buyers and sellers can communicate and co-operate. Invoices, packing lists, shipment information and other documents can be created automatically.
Integrating FX, trade processing and risk management
In relation to FX, online banking systems can provide very useful international currency services for banks’ customers. Requests for real-time rate retrieval, FX pricing, spot or forward contract placement and trading can be integrated into a Transaction Banking suite of products. FX is needed to facilitate cross-currency payments initiation and processing.
In particular, there needs to be support for the common practice of tethering a spot or forward contract to a trade transaction in order to provide a level of risk mitigation against currency fluctuations over the transaction tenor. By enabling corporations to match their trade transaction with their FX needs, a bank will have a much enhanced cross-selling opportunity. The opportunity can be boosted through the use of automated alerts and messages in multiple formats, for instance at the time that a trade transaction is initiated in a currency that is not the base currency.
Cash management is that part of a bank’s ecosystem where cash, trade, payments and FX are integrated. In true Transaction Banking, banks can extend the features of cash management to the trade portfolios of their corporate clients in order to enable the clients to better manage their working capital. Products such as account sweeps, multi-currency accounts and liquidity management tools can be introduced, to provide the corporate client with more accurate cash flow forecasting. Settlement also presents opportunities where the bank could do both collection and payment for inter-bank clearing. Further, with EIPP and EBPP in trade, banks should be able to give their clients end-to-end visibility of cash, trade, FX and payments together. Ultimately, the individual executives who use the data should be able to define how the relevant statistics are structured and when and to whom they are distributed.
Of course, a Transaction Banking suite should facilitate risk management. It should be possible for the bank to see its overall exposures to countries, correspondents and clients. It should also be possible to assess particular deals in terms of Risk Adjusted Return on Capital and other widely used metrics. Meanwhile, a corporate client should be able to see and manage the exposures of its various subsidiaries, brands, divisions or recently acquired operations.
From the point of view of the CFO of the corporate client, the Transaction Banking suite should provide the ability to distribute information within the organization according to the ‘parent/child’ model. As ‘parent’, the CFO has a complete view and the ability make well informed decisions in order to optimize the use of the corporate’s capital. As ‘children’, the various line executives only have access to the information that is directly relevant to them.
I suggest that many of the online cash management offerings of large banks are capable of meeting the functional needs of most of their corporate clients most of the time. On average, though, the offerings are six to twelve years old and sorely needing an upgrade to the latest technology and functionality. All this begs an important question: what should the banks be looking for when they update their cash management offerings? I believe that the goals should include: an enhanced user experience; a single platform for cash, trade, FX and payments that is available through a single, secure, common portal; and the possibility of Software as a Service (SaaS). I believe that there are opportunities for banks – and vendors – to leap ahead of their competitors by providing innovative and holistic solutions rather than the single-faceted products that have been common in the past.
Options for banks, opportunities for vendors
There are many attractive options for banks that are looking to expand their Transaction Banking business. The challenge is change focus from using automation to lower costs towards increasing revenue – by monetizing the ‘gold’ in the data that the banks possess. Finding paying corporate clients should be no problem. Corporate CFOs have the mandate and the funds to invest in new solutions that will reduce finance costs. Overall, though, this provides even greater opportunities for vendors:
• Many banks have reached a crossroads. Old technology does not provide consistent functionality for all clients and all purposes. Many banks are looking at replacing old technology with new.
• Banks no longer want single purpose products and instead want the potential that comes from integrated, multi-faceted solutions.
• The solutions need to suit corporates of all sizes – from SMEs to large multi-nationals.
• Many banks are increasing the resources that they are making available to their Transaction Banking businesses.
• Banks are at least prepared to consider SaaS approaches.
• For all these reasons, banks are more willing to consider vendor solutions than they have been in the past.
This is a new reality for vendors, and one that will drive new revenues and profits well into the next decade. Vendors who are selling to banks will need to have a deeper – and more valuable – understanding of the needs of the banks’ corporate clients. The vendors need to shift from being receivers of orders from the banks to becoming providers of integrated solutions to the banks.
In practice, this means that the vendors have to consolidate the various ‘silos’ within their own organisations, which sometimes involve products that are in direct competition with each other. Management teams need to be reorganized around integrated solutions rather than individual products. Compensation of, and incentives for, each product group need to be rethought.
For vendors, the ability to provide SaaS is a definite advantage. SaaS saves banks the start-up costs that are involved with on-site installation, as well as the operational costs and complexities involved with hardware and software. In the area of supply chain finance, for instance, I have seen that the vendors who have a SaaS offering have generally been far more successful than those vendors whose products need to be installed on the bank’s own premises.
Vendors whose revenues come mainly from legacy products that are installed on banks’ premises need to prepare for a new world in which the delivery of SaaS offerings through the Cloud is the norm. The product teams of such vendors will be the victims of an addiction to client-funded development, with no 12-step rehabilitation program to move them towards innovation and recovery.
Far too many legacy vendors are unable to see the opportunities and the challenges. To use another metaphor, they are donkeys when they need only be cats or dogs. Cats and dogs can sense traffic on a busy road and – usually – can take appropriate action to get to safety. Donkeys cannot sense the danger, and tend to remain in the middle of the road, oblivious to the traffic.
In this metaphor, the traffic represents those vendors who truly understand how integrated, multi-faceted Transaction Banking suites of products can benefit the banks’ corporate clients. Delivered through the cloud, the product suites offer information-rich solutions that benefit the clients and which can be monetized by the banks. Costs are contained and maintenance is much easier. When vendors take the lead in the development of Transaction Banking suites of products, all can benefit – the banks, the corporate clients and, of course, the vendors themselves.