Low interest rates prompt transaction banking strategy rethink

Kimberley Long
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In an already challenging banking environment, the fall in interest rates is now pushing transaction banks to find new ways to bolster returns, although they say job cuts are not an option.

The fall in interest rates in the UK is another setback for the transaction banking business, already hit by rising regulatory costs and falling commodity prices. After long being considered a reliable division of banking with stable returns on equity, transaction services will now find it even more difficult to make a profit.

While the decision of the Bank of England to reduce rates to 0.25% was intended to help the UK economy, the drop in revenues for banks already struggling to make adequate returns could provoke an unintended response.

Although low rates are not new in some geographies, for banks with UK exposure it is an additional pain point. 

Steve Everett, ‎managing director, head of product and propositions at Lloyds, says: "European banks have been at zero interest rates for the last few years, but if they have a strong UK presence they are now being hit on both sides."

In response to low rates internationally, many have been exploring options to prop up returns, including raising margins to borrowers and charging businesses for maintaining short-term balances on deposit. 

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Rajesh Mehta, Citi

Rajesh Mehta, regional head of treasury and trade solutions, EMEA, at Citi, says: "The global banks will have already been thinking about how to deal with reduced rates, and will have started to introduce new protocols to deal with this. They have been exploring fees but, more importantly, what can be offered as a value-add service to clients, such as innovative products and FX."

This expansion of services has been taking place for some time, with some banks choosing to include products such as card services under the transaction banking business. They might find now they need to speed up plans. 

Lloyds' Everett says: "The solution is to offer a broader portfolio. This can help to meet more of the client needs, and can levy charges for the services."

There have already been moves to begin charging for some services. Germany’s small co-operative Skatbank and Raiffeisen bank have started to charge customers for holding deposits. RBS and NatWest have informed small business customers that the bank will be changing its fees structure to a flat fee, with additional costs for further services.

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Suzanne Janse
van Rensburg, BAML

Suzanne Janse van Rensburg, regional head of liquidity for GTS EMEA, Bank of America Merrill Lynch (BAML), says some banks are taking the step to make up for losses, adding: "We have seen some banks charging for deposits where rates are negative. It can become very costly to do business and they may need to charge in order to compensate." 

However, the question of what exactly counts as a chargeable service is creating discrepancies between banks. 

Enrico Camerinelli, senior analyst at Aite Group, says this is not clear cut, explaining: "Banks are having to change the business model, asking clients to pay for services. It is difficult for them to ask to pay for transactions, so instead they look towards service fees. But what counts as a service is creating problems."

BAML's Janse van Rensburg says the bank is looking to address this by working within the corporates’ expectations. "A client recently asked what they would be charged for, and we returned the question, asking what they would be willing to pay for?" she says. "What we usually find is that it is advisory services and data which add the most value."


Services that are now coming at a cost price need to be desirable enough to validate higher fees. 

Citi's Mehta says: "Innovation is important if it is to be used to justify additional cost. If it is believed that a bank can offer the same services but now charge for it, that will be hard for clients to understand. Our clients want to be sure that they are being offered a best-in-class service, not just a vanilla banking service at a higher cost."  

Banks have also been reassessing the corporates they want to work with, broadening the client base to work with companies they can provide further fee-based services for.

Janse van Rensburg says: "Banks are looking more broadly at how they can help their clients with the working capital cycle, and add value to the process. In the past it has been possible to cherry pick who to work with – now banks also want companies they can support more across the whole working capital piece."