Disruption in Transaction Banking

Transaction banking is an area that’s ripe for disruption. It’s a business that historically has had ROEs north of 20% and been very profitable, but an area where client satisfaction has been low. A recent study in North America suggested that 60% of clients were either dissatisfied or very dissatisfied with their payment services and the financial institutions. The reasons behind that are slowness, complexity of processes, and opaqueness of fees and pricing.

Now, new technologies are offering opportunities to really change the game. Distributed ledger or blockchain technologies, for example, in a recent Bain study, we calculated, have the potential to take somewhere between 50% to 80% out of the cost of trade finance, a critical area in transaction banking. Now, not only is new technology providing opportunities, but new entrants are coming into the space, companies like Finastra in payments, Tradeshift in supply chain and supply chain software, but equally the e-commerce giants, like Alibaba, or Amazon in the US, that are beginning to play a role in financing inventories.

All of this offers challenges to banks, but also opportunities. It creates an opportunity to start to change the game in terms of complexity and cost, provide new value-added services to corporate clients, leveraging data and analytics, leveraging user experience and user interface, and being able to then start to add value in things like cash flow forecasting or just the ease and the speed of being able to clear and settle transactions. For the banks that take advantage of this, we think there is a real strategic opportunity.

Not everybody’s going to be able to win in this regard. Historically, the multinational and large corporate segment has been really the purview of the global banks. Well now, smaller, local regional banks forming consortia, maybe leveraging distributed ledger technologies, have a real opportunity to start to gain share.

It’s going to require them to think differently. It’s going to require them to partner with the appropriate technology companies. It’s going to require them to think about their own skills and capabilities in data and analytics, and their own skills and capabilities in user experience and user interface. Package those things together successfully, those banks have a real opportunity on their hands. But it will take that strategic focus and determination in the next few years for them to deliver.

Source: Bain&Company