Lowly transaction banking – that backwater business that revolves around processing transactions –has only recently begun to receive proper recognition as a major contributor to the bottom line. Having produced steady growth and profits throughout the past
several years it may just become a strategic asset for banks. With low risk and high return on assets, it’s just what the doctor ordered.
Although estimates vary, transaction banking represents about a third of the banking industry’s revenue, and has a healthy margin of over 30%. Industry analysts at Celent and Aite Group are both predicting continued strong growth to a segment that will generate
over $400 billion in annual revenue within the next five years. Driving this point home is a recent survey done by Aite Group showing that 44% of bankers see their commercial treasury clients as significantly more important to the bank, as a result of the
Banks have many good options for expanding their transaction banking business. At its core, new expansion opportunities come from combining data with transactions. There have been great strides in this area recently among many of the industry groups that
define transaction structures. For example, adding remittance data to both high and low value transactions becomes an important value-added service that improves the efficiency of corporate treasury operations. With greater efficiency in both accounts receivable
(A/R) and accounts payable (A/P), corporates will welcome these services.
Electronic invoice presentment is another lucrative opportunity for banks. By capturing this data for corporate clients, banks have the ability to develop all sorts of liquidity-related services that will optimize clients’ working capital. In times of tight
credit, the bank that can eek-out the greatest financial leverage for its customers will be highly valued and preferred. Electronic invoice presentment and payment (EIPP) is a business that is ripe for expansion. Corporate treasurers who now have the mandate
and the money to invest in new cost saving operations are more likely than ever to move forward with EIPP. On the supplier side, there are many options for banks to outsource to a service bureau, thereby eliminating the start-up costs and operational complexities.
The challenge for banks is to realign their transaction banking business model from lowering costs through automation to increasing revenue through monetizing the goldmine of data they have access to. This is the new reality for banks that will drive new
revenue and profits through deeper and more valuable corporate relationships. And by no coincidence, these are the kinds of information-rich relationships that corporates are in need of today.