Rethinking the role of the bank
According to the, Insights of The Quarter published by Bain & co, Thomas Olsen, Ada Di Marzo, Sen Ganesh and Mike Baxter inks, ‘Wolf in Sheep's Clothing: Disruption Ahead for Transaction Banking!’
Many banks increasingly see their futures bound up with a greater presence in transaction banking—the business of managing cash for companies, and financing trade and supply chains. Global banks such as Citigroup, HSBC and JPMorgan have focused on this business for years, and now others are trying to add more sources of recurring fee income as they struggle to increase their return on capital.
Local and regional banks in emerging markets also are pursuing growth in transaction banking, as they face compressing profit margins and higher capital requirements in traditional corporate lending. Transaction banking revenues tend to be less volatile than other types of banking revenues, and bankers can cross-sell products, which is critical for client loyalty.
The business also can serve as a source of more stable, lower-cost deposits that help banks maintain liquidity ratios and cost of funds. Not surprisingly, some investment bankers want to move next door to transaction banking, the Financial Times recently reported. Transaction banking has become a significant factor in bank forecasts to improve the return on equity of their wholesale divisions.
HSBC has said publicly that it expects transaction banking to generate a 20% return on tangible equity, significantly higher than that of overall wholesale banking. Société Générale plans on growing revenues in this business by €700 million, to €2.6 billion in 2022. 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.
A similar transition occurred in telecommunications more than a decade ago: Providers that used to bill business customers per international call now charge fees for connectivity solutions that enable free voice-over-Internet-protocol calls.
Banks’ roles will evolve. Some will focus on using 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. The latter would necessitate new governance structures and risk management, especially when partnering with young fintechs, and would entail sharing client data so that partners can develop tailored propositions.
