The key growth enablers of domestic transaction banks

• Global transaction banking is experiencing a paradigm shift in the way that technology is being leveraged
• Financial supply chain, correspondent banking and financial technologies are three key enablers that drive success in migrating transactions from cash to cashless
• Domestic banks have been reviewing their transaction businesses, realizing the potential to grow like never before

It is evident that global transaction banking is witnessing a paradigm shift in the way that technology is being leveraged, coupled with the radical shifts in demographics that are occurring across regions and the evolving regulatory environment that is shaping the industry today. Some of the major contributors to this have been the emergent financial technologies (fintechs) and payment banks that are forcing conventional banks, regulators and even corporates to change the way that they think and operate. Over the past 12 to 18 months, the banking industry has been attempting to catch up, but merely adopting “defensive strategies” to survive and sustain the existing business model is no longer viable.

Head of payments and cash management, institutional and transaction banking at Commercial Bank of Dubai

In the cash management space, there are three key enablers that are driving success in migrating transactions from cash to cashless – Financial supply chain, correspondent banking and fintechs.

Financial supply chain is talked about by almost every transaction bank. However, it was hardly part of any strategic initiatives or investment until 2015. With recent technological advancements and maturing big data analytics capability, banks have now realised the key to successful financial supply chain implementation.

Financial supply chain enables banks to lock in the critical relationships underlying each transaction, whether a payable or receivable, and to meet related financing or working capital requirements by linking suppliers and distributors, essentially the small and medium sized enterprises (SMEs), to the anchor corporate clients. It allows banks to make informed decisions based on in-depth understanding of clients’ credit risk profile, and to provide them with an opportunity to finance. Very few banks have developed the sophisticated data analytics capability that integrates with clients’ treasury management systems to provide operationally efficient and timely information. However, with more banks jumping onto the bandwagon, this space is going to become very competitive very soon.

The industry is also re-evaluating the traditional correspondent banking model. Domestic banks that do not have overseas operations have realised the need of having a relationship beyond traditional correspondent banking.The concept of bank partnership or alliance allows them to leverage the technology of their “partner” banks to offer faster processing of payments and a be spoke service model to their local clients. Partner banks offer each other reciprocity of cash management, treasury and trade services and even provide referral programmes. The success of such alliances ultimately is dependent on the ability to deliver better user experiences for their clients. The end result for a bank would always remain the “stickiness” of the client and its business.

I deliberately kept “fintechs” for last, as undoubtedly the most revolutionary ideas today are generated by them. We are surrounded by applications or apps that enable us to perform all kinds of transactions with ease. To a large extent, these applications already control a major part of our lives today. Yet, let me remind you, we are still in the middle of a digital revolution where developments are just starting to pick up.

The industry has been buzzing with terms like biometric, bitcoin, artificial programming interface (API), artificial intelligence, and wallet, to name a few, and they get talked about a lot across regions such as in the Middle East. Digital advocates argue that banks who adopt them sooner would be in the game while the rest would perish. The latter would lose clients who today are very technological savvy and want to perform transactions using the latest technologies. It’s a competitive world out there and fintechs are definitely helping banks to get more competitive, more efficient and win more business.

Analysts around the world have been predicting that the transaction banking business would be dominated by a few global banks. However, post global financial crisis and the new regulatory regime that ensued as well as recent technological advancements, it is no longer such a foregone conclusion and domestic banks have been reviewing their transaction businesses and have realised the potential to grow like never before.