Steady revenue streams make transaction banking attractive during times of volatility. But tech and upstart competitors are remaking the business.

Author: Anita Hawser


Laurens, DBS Bank: A bank with little legacy IT to maintain has a competitive advantage.

Asia is not only the largest and fastest-growing trade area, says Elliott Limb, global head of transaction banking at financial software provider Misys. It is also becoming the innovation driver. “This makes sense,” he says, “if you think about the fact that, as well as net exporters the rising mass affluent are also becoming net importers in some areas.” Limb explains that as intra-Asian trade flows swell, it’s in the regional banks’ best interests to make transaction processes as simple and effective as possible. Their motivation to innovate “could be a very exciting development,” he says.

In traditional trade finance, various initiatives over the years have sought to address inefficiencies in processes around letters of credit and other trade documentation. However, many of these processes remain manual and paper-intensive. But DBS Bank believes it may have the answer in the form of the blockchain, or distributed ledger technologies.

Tech experts originally devised the blockchain as a “permissionless, distributed database” for digital currencies like bitcoin, which do not require financial intermediation by a bank. Bitcoin directly challenges banks’ dominance of payments, but banks are focusing their energies on the blockchain’s potential to provide a “single source of the truth,” as fintech mavens say. DBS believes blockchain could be used to avoid duplication of funding in trade finance and to “dematerialize,” or automate, trade documents. “We’re looking at linking physical [trade] documents with blockchain tokens, which could transform traditional trade operations and drive efficiencies for corporates and banks,” explains Laurens.

Such technological advances, plus competition from challenger banks, are forcing global transaction banks to confront issues that some have avoided for centuries, says Limb. “Digitization is no longer optional,” he says. “It has become strategic for the corporates, and they expect a lot more from their banks.”

Laurens says DBS can be nimbler in leveraging new technologies like blockchain because it has less legacy IT to maintain than some global banks, is less constrained by risk and regulation, and is imbued with a culture of innovation. “DBS’s investment dollars are focused on customers and embracing digital, which was an absolutely refreshing experience,” says Laurens, who prior to joining DBS in 2014 was HSBC’s Asia-Pacific head of global payments and cash management.

Broom of BNY Mellon says the days when transaction banks could develop their own infrastructure and manage every step of a transaction process are gone. He says banks need to partner with carefully vetted third parties—either with other banks, including those with the international networks that could bridge gaps in coverage, or with third-party providers. Cloud technologies will also be important, says Broom, enabling banks to overcome legacy IT constraints by more readily updating core banking platforms and hosting value-adding applications from third-party providers.

Another change agent in GTB is the move toward real-time payments. The UK’s Faster Payments Service was the first to introduce same-day settlement for low-value payments, but similar platforms are being established in Australia, Singapore and India. Such developments are being driven by regulators looking to reduce risk and inefficiencies in payments. As a side effect, immediate-value payment systems will put pressure on transaction banks to deliver enhanced reporting around payment status and delivery. Limb says the global drive toward real-time payments is particularly noteworthy in markets like the US where payment systems haven’t changed for decades.

One region leading innovation in payments is Africa. Under a program approved in 2010, the South African Development Community’s Integrated Regional Electronic Settlement System has already implemented real-time electronic payments and cross-border standardization for nine of SADC’s 15 member countries: South Africa, Namibia, Lesotho, Swaziland, Malawi, Tanzania, Zimbabwe, Mauritius and Zambia. Limb believes the SADC initiative “will probably wake us all up to the speed that we need to do things at.”

But all the talk of transformational digital technologies like the blockchain and real-time payment systems is somewhat misleading. While some transaction banks are eagerly embracing digital technologies to transform inefficient processes and reinvigorate the customer-facing front-end, other banks are still grappling with providing sufficient levels of straight-through processing for payments and the level of transaction reporting that corporate customers require to reconcile payments and gain control and visibility over their cash.

The “customer-centric nirvana that the corporates need is not so easily implemented in the banks,” says Limb. That’s because it’s not just about improving technology but also about changing the culture and processes within banks, which takes time. So will transaction banking look radically different five years from now? “I don’t think so,” says Broom. He believes that, despite the emergence of digital currencies like bitcoin, fiat currencies will remain the primary means by which value is settled for many years to come. Still, streamlining and transparency will keep improving. “The units of value exchange will remain the same,” Broom predicts, “but technology will continue to evolve to help companies and their banks implement more-efficient processes that offer richer management information at a lower cost.”


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