Credit-related activities such as corporate financing and debt issuance remain important. However, corporates are increasingly basing their choice of bank on the financial institution’s (FI) prowess in providing efficient and cost-effective transaction banking services, such as cash management and trade finance.
Corporates want to manage working capital and liquidity more efficiently, while also limiting their financial risks. They are reducing the number of banks with which they deal, focusing on reliable, strong providers. The days of a corporate having relationships with 30 or more banks have gone; today a more realistic and manageable figure is between five and 10.
Transaction banks can provide corporates with end-to-end cash management solutions that can better manage pools of liquidity in multiple regions. The allocation of credit lines is now more frequently based on the establishment of strong transaction banking links.
But what are corporates looking for when it comes to transaction banking? There are three key elements: cost, quality and capacity. Banks need to invest in systems that will reduce the cost of transactions and also enable the management of the large flows provided by clients. This can be done via digital systems; the more digital a bank is, the less costly its services will be.
Quality in a high volume business such as transaction banking is about ensuring that transactions are processed efficiently and that incidents are kept to a minimum. If incidents do occur, they need to be managed quickly and effectively. Quality has also a lot to do with the ability to provide reporting with detailed bespoke information.
Finally, capacity is all about offering as broad a geographical footprint as possible. Corporates are engaged in multiple countries, but they expect transaction banking services to be similar in whichever country they operate. Very few transaction banks can be a ‘one stop shop’, offering services in every country globally. As a result, corporates look for transaction banks that can service geographical clusters.
In response, transaction banks need to offer a combination of pan-regional or multi-regional offerings with a deep local presence. Société Générale, for example, offers coverage across Western, Central and Eastern Europe (including Russia), with a more focused presence in the US and Asia. Clients want the reach of an international bank combined with the expertise of a deeply rooted local bank.
A New Frontier
Since the financial crisis of 2008, corporate banking has been entering a new frontier; clients require the processing of their flow business with the capacity to finance. In response, transaction banks have offered trade services in combination with financing. These include supply chain and factoring services, managing invoicing and providing clients’ suppliers with an element of financing.
Corporates are also looking for more off-balance sheet solutions in the field of factoring as an alternative for straight securitisation. It is increasingly up to the transaction bank to package such solutions for clients, which can be a complex task.
Another strong trend in corporate banking is a push towards more integration and real-time processing in order to provide rapid reporting of global positions. Technology is the driver here and transaction banks have invested heavily in developing services. However, in developing these services attention must be paid to ensuring client security as the threat of cyberattack becomes much more intense.
The evolving landscape of corporate banking has attracted the attention of non-bank competitors; new entrants are competing in parts of the value chain, which is being disrupted by Internet-based players. Overall, however, transaction banks have an advantage in addressing the entire value chain and also being able to make the significant investment required to offer holistic cash management and trade services.
Transaction banking is an environment of high investment and taken in isolation, individual aspects of the value chain are often unprofitable. It is not yet known whether the new entrants can match the strength of transaction banks in this respect. However, there is a greater prospect that transaction banks can collaborate with new entrants, embedding their solutions into the overall cash management and trade offering in order to provide the very best solutions for corporate clients. Partnerships with non-banks have the potential to deliver faster and more cost effective services to some parts of the value chain.
The Impact of SEPA
One of the most important influences on corporate banking in the past few years has been the introduction of the single euro payments area (SEPA). While considered by both banks and corporates as a significant cost burden, the market is now ready to move on and take advantage of the infrastructure that has been built. Corporates realise that they can go beyond SEPA and drive more efficiency across Europe and globally. They are pushing their corporate banks towards greater eXtensible markup language (XML) integration of treasury services beyond the SEPA region.
There is a greater willingness among corporates to deploy the XML standard in more areas, as they now understand the cost efficiencies that will result. Payment factories are coming back to the fore, with corporates eager to use their SEPA investment to drive efficiency.
Some of the most demanding clients in that field are US corporations, which tend to regard Europe as a whole. They want the same quality of service on processing and reporting from France through to Russia. Transaction banks are being asked to deploy technology in order to provide aligned services and reporting.
SEPA has brought everyone – corporates and banks alike – to a higher level of consciousness in terms of the integration of payments and transaction banking. Corporates have a greater understanding of the value that transaction banks can offer and transaction banks are investing more in extending their coverage and services.
Now, more than ever, it is critical to offer high quality services in transaction banking. Banks realise they need to make consistent and significant investments in transaction banking and corporates realise they need a range of products that have become critical to their relationship with banks.
Europe’s opening banking regulation is finally here. After months of preparation across the continent, the Revised Payment Services Directive comes into effect on January 13.
The revised Payment Services Directive regulation, regarded as one of the most disruptive in Europe’s financial services sector, will begin to make an impact on January 13, 2018.
The cost of compliance efforts for banks has increased exponentially in recent years. This is especially true for those banks that are active in the global trade finance domain, where the overwhelming expectation is for compliance requirements to become even more complex, strict and challenging over time.
This year promises to further the regulatory compliance burden imposed on financial institutions. How are firms in the sector responding to the challenge?