There is no doubt that transaction banking is growing. But is this growth straight forward and all-round… or are there some undercurrents. Let us look at some developments -

• AIB and Barclays outsourced Trade processing to ABN a few years back. Trade finance outsourcing has become common now with a number of banks & vendors offering this service. Various big names like ING and Fortis are currently rumored to be considering outsourcing their Trade Processing.
• Citi announced White labeled version of CitiDirect, its corporate internet banking platform at SIBOS 2007. Within 6 months they have signed up one of the Top high street banks to outsource its corporate internet banking channel on CitiDirect White label.
• Voca and Link merged to create Voca-link. Interpay and Transaktionsinstitut merged to form Equens. One of the attractions of ABN to RBS was the scale RBS can get with ABN’s payment business.

Market forces are driving alignments of different kind - outsourcing and consolidation. Could technology be further pushing banks towards this consolidation? Let us explore some of the drivers –

• Margins in Transaction banking are under severe pressure. A Capgemini study conducted in 2007 for the European Commission estimates the average bank fee for a payment to go down by up to 43% (from Eur0.65) in the next 4 years. As one European banks executive recently described – ‘payments will soon be like email – free service to attract customers’
• Corporates are looking at consolidating banking relationships. With initiatives like SEPA and PSD corporate treasuries are increasingly looking to centralise operations through initiatives like Payment factories, collection factories, etc. A Tower group report expects 80% of European payments volume to be handled by just 10 multinational banks (the same volume is handled by around 300 banks at present).
• The cost of building and running a competitive technology platform for transaction banking is becoming prohibitive. The numbers that I have heard in various discussions with corporate banking CIOs are staggering! The cost of implementing a new payment solution is over Eur100 mm, global corporate internet banking platform can be anywhere between Eur50 mm to Eur200 mm. Regulatory compliance for BASEL, MIFID, SEPA, etc can be huge. Eur10 bn is an estimate for European banks just to comply with SEPA.

The pressure on margins combined with the increased cost of technology will drive the small and mid-sized transaction banks to re-think their business models. They will have to focus on their core strength areas (customer relationships, value added products, etc) and outsource/collaborate on other areas. The larger players will have their own challenge of building further scale and ultimately driving down the cost per transaction.