Future of transaction banking is full of possibilities & it will be primarily driven by customer experience, higher B2B collaboration & exchange of information, real time transaction management & view of cash.
Banks not only need to make sure they serve customer across SME, whole sale and corporates well, but also keep an eye to end customer (customer's customer) to play a role in the end to end value chain.
Post crisis era (2008 onwards), transaction banking customers diversifed the portfolio to avoid concentration risk. This made interbank relationship, standardization of infrastructure and services very critical. Moreover, the ROE for most of the banks are
way below that used to be prior to 2008. Banks used to operate at 20-25% ROE. Whereas current day average is 10-12%. While BASEL III requires higher capital adequacy requirements. Focus on cost reduction (CIR), cost to serve reduction and generating additional
revenue can help banks go to the level of 15-18%. Opportunities are more in emerging markets. But banks needs to be cognizant of the fact the need of the customer, cost of doing business and regulatory requirements are different.
While Transaction banking move from need based business model to value driven business model, following areas will be critical for further consideration:-
Future of SWIFT -
SWIFT is becoming more relevant. Last few years industry has been focusing on risk and compliance, and everyone was beginning to come to terms with the challenges and possible around it. Now the focus gradually shifts towards technology led disruption. SWIFT
already playing critical role in Target2Security single EURO settlement engine project. multiple upcoming ISO 20022 based payment clearing implementation coming in Australia. The moot point is ISO 20022 XML standard is the right way to go or not. Political
tensions with Russia-USA mean that the country is keen to cut its dependence on systems such as SWIFT and create its own alternative. But, I think SWIFT standards are going stay for now, till a better standard comes.
Technology to create ecosystem -
Technology is enabling banks to create a larger ecosystem outside the 4 boundary walls. API economy will drive Multi-banking platform integration and help create effective business models. Post crisis world, clients expect banks to talk to each other in
a standard way (SOA architecture than Point to Point integration) and participate in collaborative value creation exercise.
NFC, m-Wallet, tokenization and other mobile technologies can also help expedite payment recovery and collection, leading to improvement in liquid cash positions. It can also enable unbanked and developing country clients to participate in transaction banking.
Customer is important, but customer's customer is equally important -
Customer experience and intelligence is key for successful business. It's no longer only abt product and services, aligning to holistic need of the customer is necessity. While banks focus on providing right services to business customers, it's important
to understand how can they help their customer sell more. It’s the understanding of end buyer or consumer of service is key to be successful in the digital economy. Establishing traceability of transaction from start to end and ability to gather, analyse the
end customers preferences will help design right products& services. With the advancement in real time analytical and business intelligence capabilities, Banks can start to participate in this value chain more effectively.
Real time Cash management & end to end traceability -
While few countries implemented faster payments (UK, Singapore etc) leading to better customer experience, in reality reconciliation, interbank settlement and accounting system updates sometimes take T+2, T+3. Today's treasurers want:-
- Real-time visibility of balances across geography, currency and banking institutions
- Predictability of cash flow
- Centralized access to funds & Optimization of cash balance
- Higher rate of STP execution
This will positively impact cash management to improve net interest income, full cash conversion cycle for customer, liquidity management.
Security & risk management -
Focus needs to be in security and risk management to protect customer interest. The interbank and client network needs to be secured (SWIFT networks), POS and payment transactions should have the right authentication and authorization mechanism to reduce
any risk. Standards like OAUTH, Open ID for APIs; Tokenization for mobile payments are evolving. SSL encryption is also key for communication level securities. With the evolution of Big data paradigm, right device and storage level security also needs to be
put in place.
Impact of Cryptocurrency -
Few years back Bitcoin was not even take seriously. But now more and more usecases and adoptions, Bitcoin could potentially be the future of international banking. Provision of crypto currency in transaction banking should be considered in near future.