“With the march of technology gathering pace, will traditional transaction banking still have a role to play in the longer-term future of treasury?”

Amara’s law dictates that we overestimate the effect of a technology in the short run and underestimate the effect in the long run. We tend to focus on the here and now, but we barely notice when the change happens slowly overtime. Do you remember when Google Maps was launched? When Google added navigation and real-time traffic estimation? Most of us adopted these tools gradually, and it feels that they have always been there. It is the same story with transactional banking – like any other business, it is adopting new technologies to compete and survive in the future. The change is there, even if we do not notice it.

Reality check. All around us we hear buzzwords: machine learning, artificial intelligence, APIs. The day-to-day reality I deal with while working with the biggest global banks is very different: the onboarding and connectivity process is very slow, there is little flexibility provided by banks in file naming conventions due to hard-coded IT requirements, basic end-of-day statements are incorrect and sometimes they even mysteriously ‘disappear’. The reality is that incumbent banks struggle with multiple legacy systems and complex internal structures in different geographies. Heavy investments and time are required to replace existing IT infrastructure.

Is it really that gloomy? Absolutely not! Things are improving very fast. Just not as fast as we want it. Competition and technological changes make treasurers’ lives better each day: payments have become faster and cheaper, TMSs offer multiple ways to connect to banks, SWIFT gpi provides better tracking, there is more visibility and clarity on banking fees. Especially in emerging markets, the paperwork burden has been a big challenge. I remember, in India, supporting documentation requirements for cross-border payments being overwhelming. I was very pleased to see how banks started to accept it electronically via online banking or SWIFT.

What are treasurers looking for in transaction banking? I rarely hear my peers referring to their banks as ‘transaction banks’. Typically, I hear ‘our (core, non-core, tier 1…) relationship banks’. It is because treasurers value the relationship, the proactivity, the full package of services that banks provide, even beyond transaction banking. During bank selection and evaluation projects, the cost of services is rarely the key consideration. Neither is it purely technological solution. The decisive criterion is often the feeling that when everything goes wrong, the team in front of the treasurer will resolve it.

Will transaction banking have a role in the future? In my view, the role of transaction banking will not disappear anywhere in the future. It will evolve together with technological progress and adapt to the needs of companies. Next to major transaction banks, new agile players are popping up and trying to find their niche in areas of traditional transaction banking. Considering how low barriers of entry have become and how fast software solutions can be scaled, smaller specialised service providers are putting pressure on incumbent players. Banks will have to learn how to operate (and cooperate) in the new digital treasury ecosystem. However, it should not be forgotten that technology is there to improve processes, not to replace relationships and commitment to excellent service when technology fails. It will be very interesting to see who will prevail!

Trade finance is a great example of where the bank’s offering can be taken entirely in-house by a corporate to directly offer its customers trade finance solutions. In many respects this was always a better option than going through a third party (the bank). The corporate would already have collateral in terms of goods from the supplier and access to key data from that supplier such as payment history and trading pattern. Several treasury management systems (TMS) now have trade finance solutions as an additional module, and when integrated with the main cash management functionality allows a complete view of liquidity in one place.

As globalisation continues for corporates, so does the need for foreign exchange transactions. Although the banks still ultimately execute the trades (for the most part), today’s rise of dealing platforms means banks are forced to compete more acutely for business that used to come directly on a relationship basis. Again, technology advances, in this case via integration from TMS systems, means corporates are able to streamline a process and capture better pricing to such an extent that the savings from just a few months of transactions can recoup the project cost to implement.

In fact, to some extent, the vast technical infrastructure that most of the global transaction banks have developed is actually a disadvantage to their progress in this new world. The commitment to build systems to run at a massive scale with efficiency developed through siloed processes runs contra to the way smaller and nimbler fintechs are able to develop.

Extrapolating from this point leads us to conclude that the one-stop-shop model of traditional transaction banking cannot be the most cost-effective solution for a treasury. The key to exploiting these new options is to pick the right solution for each specific business process, as part of an overall treasury strategy rather than a set of individual disconnected choices. Investing in developing such a strategy for corporates takes expertise, time, and commitment. In that sense, one can see where for some corporates the traditional transaction banking model offered by one financial institution may still be of benefit for now.

Increasingly, rapid advances in technology can prompt questions about the relevance of traditional transaction banking. Technology undoubtedly enhances the payments ecosystem but the fundamentals at its core will continue to retain their importance in the future. Here we examine the practicalities.

The very basic block of transaction banking is the demand for accounts where cash is deposited with a licensed entity; one which suits the treasurer’s risk appetite and currency needs. The requirements for a central bank or local regulatory body to issue a banking license are onerous and require an organisation to have rigorous governance procedures and monitoring processes that are regularly reviewed and reported on – and of course the requisite capitalisation.

While technology is transforming the payments landscape, payments and liquidity management go hand in hand. Liquidity management at its heart is about optimising how clients maintain cash deposits, often in multiple currencies and jurisdictions, involving pooling structures for example. Technology can improve visibility to pool balances and speed the movement of funds across the structures, but the fundamental need is for the offsetting of credit and overdrawn balances. This links to another basic element – the provision of credit.

Transaction banking also requires the secure settlement of payments across the globe. Direct clearing access and secure, resilient platforms remain fundamentally important to clients, and this preserves the need for traditional transaction banks which have established experience in financial and market regulation. As with a banking licence, membership of national clearing and settlement mechanisms is a significant undertaking bringing another layer of compliance, resiliency and security obligations which remain the preserve of transaction banks.

Another important element to highlight is how we are seeing more payment and technology providers take steps to obtain bank licences as a result of PSD2 and open banking. This is so they can meet “traditional needs” as well as innovate payments; and they can often bring new technologies to prototype earlier due to their nimbleness. Some of these technology companies are going further along the path to transform into banks, but it is yet to be determined how many will chose to take on the regulatory and capital burden that could dilute their raison d’etre.

Technology advances will continue to revolutionise payments, but as we reflect on the building blocks of transaction banking, the core fundamentals of payments will always have a role to play.