Growth through transaction banking
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Growth through transaction banking

A new report from management consultant Boston Consulting Group (BCG) says payments and transaction banking businesses represent a critical area to the global banking industry and offer a ‘key lever for improving return on equity’.

Transaction banking has gained greater recognition within the banking industry since the beginning of the financial crisis. Once viewed as the poor relation of investment banking, transaction banking is now seen as crucially important to the overall profitability of the bank.

The BCG report says global transaction banking revenues were worth around $220 billion in 2012 – around 15% of all corporate banking revenues. Around $140 billion came from transaction specific fees and current-account-related revenues, which are forecast to reach more than $350 billion by 2022.

“Transaction banking has continued to deliver the annuity-style revenue that make it so important to the broader banking group,” says Diane Reyes, global head of payments and cash management at HSBC. “It has also shown revenue growth despite the low interest-rate environment.”

Dub Newman, head of global transaction services (GTS) for North America at Bank of America Merrill Lynch (BAML), says: “Five years ago, our collaboration with the investment bank was very limited, but today our investment bankers recognize that our business has consistent revenues backed by consistent costs – and that you’ve got to have treasury management business with a client as a foundation of relationship profitability in order to capture more episodic revenues such as a major M&A transaction.”

Satvinder Singh, global head of trust & securities and cash management, financial institutions, at Deutsche Bank, adds: “Transaction banking faces an uncertain external environment with notable headwinds, but also significant growth opportunities for well-positioned transaction banks.”

Driving growth

The growing importance of transaction banking has echoed the growing profile of corporate treasury within organizations. As companies have placed increasing focus on the tools and solutions needed to drive internal efficiencies and improve cash-management processes, banks have likewise developed their offerings in this area.

“In difficult times, clients have had to figure out how to make themselves more efficient and do more with less,” says BAML’s Newman. “As a result, there has been a growing focus on working capital solutions. At the same time, clients increasingly regard working capital as a low cost way of funding their businesses.”

Newman adds that one corporate client was able to fund half of a $3 billion acquisition through better working capital management. At the same time, the stable revenues offered by transaction banking have become more highly valued.

Karen Fawcett, group head of transaction banking, Standard Chartered, says: “After the financial crisis, the industry has witnessed a renewed recognition of the value that transaction banking brings, both in terms of being a stable and predictable source of revenue, and as a steady liquidity engine.”

Regulatory factors have also played a part in elevating the importance of transaction banking.

Fawcett says that with an increased regulatory emphasis on liquidity, banks are paying greater attention to trade finance and operating accounts. “Transaction banking deposits are the operating accounts of our clients – their current and savings accounts,” she says. “These operational deposits are sticky, which means they don’t move away in a crisis for a variety of reasons.”

Given these factors, it is no surprise that banks are focusing on transaction banking as a source of revenue. Fawcett says: “[At Standard Chartered] transaction banking achieved $3.6 billion operating income in 2012. We benefited from strong levels of client activity and witnessed increased volumes in our transaction banking business [cash grew 13%, trade finance grew 18%] in H12013, despite intensifying competition.”

HSBC’s Reyes says: “Our three transaction banking businesses are payments and cash management (PCM), global trade and receivables finance, and HSBC securities services. Last year they contributed $11.4 billion to HSBC. PCM revenue was $6.2 billion in 2012, up from $5.6 billion in 2011, with compound annual growth of 15% between 2009 and 2012.”

BAML’s Newman points out that the strategic importance of transaction banking to the bank as a whole can be measured in two ways: by its size and by its influence within the organization.

“Our transaction banking business within Bank of America Merrill Lynch represents about 8% of revenues, over 5% of expenses and 27% of deposits,” he says. “It has very strong return measures. With transaction services, you’re getting a much larger percentage of profitability out of revenues than other businesses. It is also a very large provider of core deposits.”

Where influence is concerned, Newman says he sits on the bank’s North America capital review committee, which decides on capital extensions to corporations within the region. “We’ve become – and appropriately so – very influential in the decisions we make regarding which clients to support with loans and capital commitments that we might make,” he says.

As banks have become more attuned to the benefits of transaction banking, they have also stepped up their investment in this area. BAML, for example, has invested $1.2 billion into its GTS platform in the past four years.

Standard Chartered, meanwhile, has been rolling out a new custody and funds administration system across all of its markets as well as enhancing its cash systems, refreshing electronic channels and expanding its branch networks.

And Deutsche Bank, according to Singh, aspires “to double the profitability of our transaction banking division by 2015 on the back of defined strategic initiatives and targeted investments in scale, technology, solutions and people”.

The importance of transaction banking might have taken some time to be elevated, but with the continuing focus on stable revenues, coupled with the impact of regulatory pressures, this position of strength is likely to continue for the foreseeable future.

Gift this article