Cash & Liquidity Management

Embracing digital

Published: Mar 2019

Business person about to shake hands with a robot

As the global transaction banking landscape continues to evolve, where are the opportunities, how should banks be positioning themselves for success – and how can they work effectively with fintechs to leverage new developments?

From the rise of APIs to the arrival of real-time payments around the world, a variety of catalysts and developments are continuing to drive the global transaction banking landscape forward. At the same time, innovative fintechs are developing new technologies and services which are placing pressure on banks either to compete effectively with these new initiatives, or to join forces with fintechs. How can banks position themselves for success in this rapidly evolving market?

Challenges on the horizon

A report published last year by McKinsey, Global payments 2018: A dynamic industry continues to break new ground, identified six main challenges facing the transaction banking industry in the short to medium term. These included:

  • Determining who will be the next competitor “in a fast-moving and crowded global digital business”.

  • Harnessing the next digital innovation and “striking a balance between the scarcity of capital and development resources and proliferation of technologies and initiatives”.

  • Leveraging digital platforms “to meet clients’ expectations for a seamless end-to-end experience”.

  • Digitising to improve operational efficiencies.

  • Developing digital services to create new revenue streams.

  • Managing change and attracting new talent.

The report warns that with the pace of digital disruption accelerating across the GTB value chain: “If they fail to pursue these disruptive technologies, banks could become laggards servicing less lucrative portions of the value chain as digital attackers address the friction points.” In order to avoid this fate, the report states that banks need to embrace digitised transaction banking.

Resistance is futile

The importance of embracing digitisation in transaction banking is widely recognised – but for banks, achieving this may involve stepping outside the comfort zone.

“The question is, how much can banks embrace the enrichment of data round transactions using open APIs, and how much will they resist it?” says author and commentator Chris Skinner, whose roles include chairing the Financial Services Club. “Because at the moment I see a lot of resistance – I don’t see so much embracement.”

Skinner says that while a small number of banks “see digital as part of their DNA and are trying to transform their organisations from the ground upwards”, these are few and far between. He adds that most banks “still see digital as a project, and are resisting embracing what it can actually do for their organisations and their businesses”.

While Skinner says this applies to all banks, he sees transaction banking as the “low hanging fruit”, because nearly everything happening in the fintech world focuses on transactions as the starting point. “So if a bank is resisting enriching data in transactions by using open partnerships, then they are actually missing a trick.”

From overlay services to falling fees

There are certainly plenty of opportunities to embrace digitisation in the current landscape. Jerry Norton, Head of Strategy UK financial services at CGI, cites the rapidly maturing instant payments market, and the improving global interconnectivity between correspondent banks and payment providers, as the most interesting developments this year.

“Not only will this lead to further infrastructure provision and the refresh of commercial banking business and technology, but more importantly to new ‘overlay’ services for customers and participant banks alike,” he says, noting that this, in turn, will lead to better customer propositions and journeys while facilitating innovation and lower costs. “For example, SWIFT gpi will allow customers of banks to track their payments and credits internationally.”

But alongside the opportunities brought by innovation, banks will also have significant challenges to overcome. Norton notes that individual fees for payments are likely to reduce as a result of competition and regulation. “Banks should plan for direct payment revenues to fall to next to nothing,” he says. “Therefore banks will have to seek volume and/or use value added services to compensate for potential overall revenue reductions.” Consequently, transaction banks “will have to find new ways of charging, rewarding loyalty and developing new services”.

Embracing innovation

Key to this is embracing innovation and understanding how new developments can best be harnessed.

“A key balancing act to be faced is how to capitalise on the innovation whilst supporting the barrage of regulation being imposed, and how to carefully balance efficiency in the face of these rapid changes,” comments Hasan Khan, Head, Transactional Products & Services for Standard Bank Group. He adds: “There is no denying that businesses underpinned by digital capabilities are better placed than those struggling with legacy infrastructure.”

Where transaction banking is concerned, there’s no shortage of technology innovation poised to transform services and processes, from AI and RPA to APIs and blockchain. But it’s also important to keep a clear focus on the real challenges faced by corporate treasurers, and the developments which have the potential to address these.

“Every year, we ask what clients are looking for in terms of innovation and what we could do better from a transaction banking standpoint,” says Hubert J.P. Jolly, Global head of Financing and Channels for GTS at Bank of America Merrill Lynch. “And when we survey them about innovation, we don’t see terms like blockchain, API or cloud come up recurrently. If there’s one area that is always raised up as a major challenge for our clients, it’s know your customer (KYC) and on-boarding.”

Real-time payment networks

Among the most significant developments in the transaction banking world is the rise of real-time payment networks. The launch of the UK’s Faster Payments Service in 2008 has been followed by numerous other initiatives, such as Singapore’s FAST platform, Australia’s New Payments Platform (NPP) and Europe’s RT1 instant payment system. Other schemes are currently in the pipeline. Replacing older clearing systems, these services bring people and businesses the ability to send payments instantly – and while the focus of development so far has been on domestic initiatives, cross-border real-time payments initiatives could follow in the future.

Ad van der Poel, head of Product Management for GTS EMEA, Bank of America Merrill Lynch, explains that of particular interest for treasurers is the impact that real-time payments have on liquidity management. Historically, treasurers have had daily or weekly payment runs, which requires them to ensure there is enough liquidity in the relevant accounts at the time when the payment file goes out. “But if you talk about 24/7 real-time payments, in order to do a payment you need money in that account all the time,” says van der Poel. “So implementing real-time payments is not just about the payment part – it’s about how you manage liquidity as well.”

Van der Poel points out that in the B2C arena, real-time payments also have implications for customer expectations. “If a business accepts real-time payments from their clients, then their clients will expect that the service or goods they are paying for will be available in real-time as well,” he says. “So businesses also need to look into the broader service they offer their clients when they are thinking about real-time payments.”

As companies increasingly need holistic intraday liquidity management, fintech capabilities are beginning to appear in this space, says André Casterman, CMO at transaction data management technology provider INTIX and NED at Tradeteq, an investment platform for bank-originated trade assets. “The challenge for banks is to pull data from different back offices in order to have a continuous, consolidated liquidity view,” he notes. “That’s where fintechs can help as add-ons to internal systems for capturing the data and giving a consolidated view of the liquidity position.”

Alongside the many benefits of real-time payments, these systems also have implications where fraud is concerned. A white paper published in 2018 by data analytics company FICO notes that while new payments infrastructures bring efficiency and convenience to consumers and businesses, “those same payments infrastructures also offer those benefits to criminals”. The paper adds, “the speed at which money is now transferred via a real-time payments environment puts an immense amount of strain on legacy technology and manual anti-money laundering processes.”

Van der Poel says that while real-time payments mean payments are completed immediately, “that just means that you have to execute the controls you have in place very well. It’s more about educating our clients about how they prep their payments, which is key to all of this.”

Innovation in trade finance

Meanwhile, trade finance is another area where innovation could bring major changes. Casterman says that fintechs have a role to play in digitising the trade distribution space. “Fintech platforms can act as a bridge enabling the exchange of assets from transaction banks to capital market investors,” he explains. “They can help banks originate trade flows – whether that’s loans, letters of credit, receivables or supply chain finance – and distribute them as quickly as possible to liquidity providers, such as pension funds and hedge funds.” He adds that these developments can help banks overcome the balance sheet challenges arising from Basel III.

Within the area of trade finance, Casterman cites the rise of new platforms and ecosystems within both the corporate-to-bank and bank-to-investor space which make it possible for multiple parties to engage in transactions. “Banks will increasingly join these platforms in order to operate their transactions with their counterparties, rather than having all the intelligence in their back office and just using the messaging platform to communicate,” he predicts. “So the bridges banks will be using are not just messaging bridges, but more workflow related platforms.”

Casterman also says that banks are facing new competition in the area of receivables financing. “Some banks might tell you it’s not competition because these platforms are financing clients that the banks don’t want to finance,” he says. “But one day, these platforms may be attractive to the corporates that the banks do want to finance, so the banks should certainly be watching these developments.”

Fintechs: competition or collaboration?

Indeed, the spectre of competition from fintechs is a regular feature of discussions about the future of transaction banking. In recent years, banks have been assessing whether the arrival of innovative fintechs within the transaction banking space should be regarded as a threat or an opportunity. On the one hand, innovative startups, characterised by a level of agility which is difficult for banks to achieve, have been able to take advantage of technology to offer a variety of services in areas ranging from payments to investments. But fintechs also lack the scale and established customer base associated with transaction banks.

Standard Bank’s Khan notes that fintechs have the ability to target specific customer pain points and address them in an innovative way. “Consequently, collaboration has definitely become more important – as has knowing when to co-operate and when to compete.”

While the potential competitive threat presented by fintechs are certainly a concern for banks, CGI’s Norton argues that there are “bigger threats from within the industry itself”. He says that while fintechs have helped show transaction banks the potential of new services, and how this potential can be realised, “it is much more likely that the transaction banks will make those changes themselves, or team up with fintechs in order to do so. It is less likely that fintechs will be able to take business from transaction banks on their own.”

Bank of America Merill Lynch’s (BofAML’s) Jolly says that there are two different types of fintechs. “The first are public software enterprises that our clients use to drive efficiency in their treasuries, such as ERP and treasury workstation providers,” he says. “The second are the smaller fintechs that are looking to potentially disrupt the transaction banking space.”

Where the first type of fintech is concerned, Jolly emphasises the need for banks to engage with vendors to understand how their offerings could impact clients’ treasury functions. “The second bucket is more of an opportunity than a competitive threat,” he continues, explaining that BofAML has the ability to on-board fintechs as vendors and market their products as part of BofAML’s offering.

“Our view is that it’s an opportunity – but you need to have a platform to be able to work with these fintechs quickly, embed them with your services and be able to market their services,” he says, noting that this approach is “best for the fintech, and best for our clients”.

Of course, not all banks willingly embrace collaboration with fintechs. Skinner says resistance can arise from concern about damage to customer base retention. “If you open up to partners, the feeling is that you are opening up to choice, and therefore the customer may switch or go away – rather than saying, ‘If we don’t give the customer the choice, they’re going to switch and go away anyway’.”

“Transaction banks have realised that there is no option but to leverage disruptive tech in solving real world problems,” says Vinod Madhavan, Head, Trade for Standard Bank Group. “And towards that, working with fintechs is a no-brainer.” But like Skinner, he differentiates between banks which have fully embraced this, and those which are still in ‘watch and wait’ mode. “Standard Bank Group is in the former category,” he adds, pointing out that fintechs have much to gain from partnerships, “as they get to leverage the existing infrastructure and existing client base that banks can get to the partnership.”

Poised for success

Against this backdrop, how can transaction banks best position themselves for success? CGI’s Norton says that banks should “aggressively open up their processes, data and systems to allow third-party access, whether directly by customers or via third parties”. At the same time, he says that banks need to “court suitable fintechs and introduce flexible new services to help corporate customers in their own digital journeys”.

This means adapting to the changing needs and expectations of corporate clients. Jolly explains that CashPro®, BofAML’s digital portal, has shifted over time as clients have increasingly embraced technology and digitisation. “It’s the idea over time that this will become a digital assistant,” he says. “We’ve already installed live chat, and one of the big enhancements we launched last year was giving clients the ability to use CashPro® Assistant to refresh their KYC and exchange documents securely.”

Last but not least, Standard Bank’s Madhavan emphasises that transaction banks need to focus on delivering value to clients – for example, by focusing on solving real-world problems – and on helping clients to grow, manage risk and tap into operational efficiency. “While doing so, it’s critical that transaction banks focus on doing the ‘right business the right way’,” he concludes. “Leveraging the disruptive tech, and collaborating with fintechs, positions transactions banks well towards doing the same.”

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