Transaction banking to play key role in restoring banks' ROE

Transaction banking to play key role in restoring banks' ROE

The wholesale transaction banking business continues to play a starring role in improving return on equity in the global banking industry, with revenue from fees and accounts forecast to grow at a compound annual rate of ten percent over the next ten years.

In its eleventh annual report on the global payments industry, the Boston Consulting Group (BCG) reports that in 2012, wholesale transaction-banking revenues totaled approximately $220 billion, about 15% of the total corporate-banking revenue pool. Nearly $140 billion came from transaction fees and account revenues, which are projected to grow at a CAGR of 10% over the next ten years, reaching more than $350 billion.

BCG's research suggests that leading banks, or "transaction-banking champions," achieve above-average ROE on their wholesale business and also generate more funding (with loan-to-deposit ratios lower than 125%).

"These banks differentiate themselves from their peers with a clear sense of their strategic strengths and boundaries as well as a relentless focus on execution excellence," states the report. "They pay strict attention to how they sell, how they price, and how they organise their servicing model, cutting across traditional silos."

Looking more broadly, the payments and transaction-banking businesses of the world's banks generated $301 billion in transaction-specific revenues (including monthly and annual card fees) and an additional $223 billion in account-related revenues (including account maintenance fees and spread revenues) in 2012. The total represented roughly a quarter of total global-banking revenues.

Banks handled $377 trillion in noncash transactions in 2012, more than five times the amount of global GDP.

By 2022, payments and transaction-banking revenues will reach an estimated $1.1 trillion, a compound annual growth rate (CAGR) of eight percent. The value of noncash transactions is tipped to reach an estimated $712 trillion by 2022, a CAGR of nearly seven percent.

The report notes that there are widening gaps between how payments are evolving in mature economies and their evolution in rapidly developing economies (RDEs). From 2012 to 2022, both payment values and volumes are projected to grow at a CAGR of 11% in RDEs, compared with four percent and five percent, respectively, in the developed markets. Similarly, RDEs will generate stronger revenue growth - a projected CAGR of 12% in total payments-related revenues - than the developed markets, which have a projected CAGR of five percent.

According to the report, the digital revolution is having a dramatic impact on retail commerce and how people make purchases. The e-commerce market, estimated at $1.1 trillion globally in 2013 (up from $0.5 trillion in 2002) is expected to grow by 15 percent per year even in mature economies such as the US and the UK.

BCG forecasts that transaction-related revenues generated by consumer-initiated (retail) payments worldwide will increase from $249 billion to $460 billion from 2012 to 2022, a projected CAGR of six percent. North America and Asia-Pacific will be the strongest regions, with RDEs in the latter posting the most robust growth. In addition, account-related revenues will grow from $138 billion to $321 billion, a projected CAGR of nine percent.

Carl Rutstein, a coauthor of the report and the leader of BCG's transaction-banking segment in North America, comments: "In what we call the 'new new normal' climate, banks need to become more innovative across the value chain of retail payments - from data analysis, customer segmentation, and product development all the way to rewards bundling and commingling products' value propositions."

In a two-speed world of low growth in developed markets and high growth in emerging markets, payments are still very attractive, adds co-author Stefan Dabs, "but banks must find optimal business models and excel at execution if they hope to succeed."

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