Transaction banking in the age of disruption –
are we sleeping through a revolution?
last 8-9 years since the global financial crisis. The question for us as we go into 2017 is: are we responding sufficiently to the disruptions to make sure that we will be
sound, relevant and competitive in the future?
To answer this question, it would be worthwhile to first look at the current landscape to see
why transaction banking needs to act swiftly
and collectively; second, we should identify
the factors that are driving us to rethink our
business model; and finally, we should explore
how to stay competitive and avoid sleeping
through the revolution.
Lisa Robins, head of Global Transaction Banking, Asia
at Deutsche Bank provides a modern day metaphor of
the Rip Van Winkle story to describe an industry facing
unprecedented change.
“O
ur modern economy is littered with
stories about incumbent firms that
saw their fortunes reversed when they
were caught unprepared for disruption
caused by technology and the changing
demands of the marketplace. Examples
include Kodak, which missed opportunities with digital photography and traditional
The current landscape in transaction banking
entertainment channels, which were
In the current landscape, we continue to
uprooted by streaming media.
meet clients’ needs through our core pilThe banking industry is now
lars of transaction banking: trade finance,
in the spotlight around this same
securities services and cash management.
narrative. With all the disruption
These pillars have performed well thanks
that has occurred since the finanto the rise of intra-Asian trade and
cial crisis, people are questioning
Asian companies’ use of trade finance,
whether banks have moved fast
the increasing emphasis on efficient
enough to imagine the future
cash management to place companies
and accommodate how our cliin a better position to mitigate risk
ents want financial services to be
and generate more working capital
delivered.
internally and the increasing capital
The disruption of the busimarket
flows into Asia, prompting
ness models of incumbent inRobins: Transaction banks have the advantage to
investors
and issuers to increasingly
dustries reminds me of the story
address the entire value chain
require core securities services from
of Rip Van Winkle. This classic
trusted counterparties.
short story, set around the time of
We continue to adapt and innovate to meet clients’
the American Revolution, is about a man who falls into a
needs through initiatives such as TARGET2-Securities,
deep sleep after wandering into the mountains. He awakSWIFT’s global payments innovation (gpi) initiative and
ens 20 years later and returns to the village to discover
the Cross-border Inter-bank Payments System (CIPS) in
that everything has drastically changed. The village has
China. But equally, the industry has come to realize that
grown much larger, new houses have replaced old ones,
legacy systems are a big barrier to banking innovation
and a Yankee hotel occupies the spot where an old Dutch
and the potential to exploit big data analytics.
inn previously stood; a portrait of George Washington
The current landscape is also dynamic with new Finhas replaced one of King George III. The people are difTech entrants, regional banks and global providers that
ferent, too. Rip is now an alien in a place where he was
force transaction banks to rethink their business and oponce well known. The moral of the story is that change
erating models. The number of multinational companies
is inevitable and that there is a huge price to pay if you
(MNCs) doing business in Asia and dealing with Asian
try to evade it.
banks for their business in the region has grown. Today,
What does this story have to do with transaction
Asia Pacific banks’ share of total international claims
banking? It has been over 20 years since the key pillars of
on the emerging APAC region rose from 31% in 2007
the industry really took off. During that time, the industo 57% in 2014. Banks’ settlement fees stand to be furtry has changed dramatically even if we can condense the
ther eroded by the risk of third-party mobile payment
timeline of the Rip Van Winkle metaphor down to the
NOVEMBER 2016
38
pushing their costs up and preventing them from innovating, we cannot allow this to deter us from innovating.
But there is a difference between opportunities in product-led innovation versus investment into innovation to
develop new competencies.
FinTech has presented a competitive threat to
Forces of change
banks, but it is encouraging to see that the narrative
To be sustainable, transaction banks need to earn a deis shifting towards how banks and FinTechs can work
cent return from their role in credit intermediation –
together. The FinTech industry has achieved rapid suchistorically the business model has been very dependent
cess but generally it is still operating at the margins of
on interest rate margins. However, a prolonged period
banking. There are several bottlenecks that the indusof low growth and low interest rates is dampening banks’
try now faces;
profitability. Europe, for example, has adopted a nega• Translating success in specific niche pockets into
tive interest rate policy. In this environment, the induswider success in wholesale banking
try can no longer rely on these margins. It needs to sim• Heightened regulatory oversight is taking shape. This
plify, standardise and take out costs.
has been driven by a realization that some FinTech
The evolving regulatory landscape is also challenginnovations (e.g. payments, virtual currencies) might
ing profitability. Banking regulation such as Basel III
lead to the circumvention of tax, capital controls,
makes it expensive for banks to hold non-operational
sanctions, AML & KYC checks, etc. Many FinTech
short-term cash, and expensive to interact with other
companies have been established within the regulatory
large financial institutions due to concern about interframework of their home market and have found it
connected risks. Basel IV is currently being formulated
challenging to scale their service across borders where
and is likely to trigger more capital-raising, to increase
regulations differ.
the costs of long-established trade finance products like
• Financial institution connectivity is needed to allow
ECA and others.
FinTech innovations to grow beyond their niche. EsResponding to these factors quickly is not easy. Trapecially in relation to the development of new payditional transaction banks are constrained by legacy inment rails, such as digital currencies and distributed
frastructure and organisational imperatives. These conledger technology, as well as initiatives by central
straints and challenges are impacting our ability to adapt
banks to adopt real-time payment systems.
to change. Meanwhile, agile new entrants continue to
On the other hand, transaction banks have the adnibble away at the margins.
vantage of being able to address the entire value chain
While we might be perceived to be unresponsive,
at a time when many corporates would like to see cash,
those challenges are in fact limiting the speed in which
trade, working capital and FX services provided in a howe act. Here I would argue that, unlike Rip Van Winkle,
listic fashion.
we have not been sleeping through the change. Instead,
While FinTechs have the advantage of being small
we have been slow to act. We have been hitting the proand nimble, we have the advantage of scale and scope –
verbial snooze button on the wake-up call to change
together we can work to build a new paradigm. These
because the weight of the legacy that prevents us from
need to be combined if they are to deliver technologileaping out of bed.
cal offerings that meet changing customer expectations.
Faced with these challenges we can either act or asFor both parties, a partnership should liberate them to
sume things stay the same. While we accept that things
focus on their core competencies.
cannot stay the same, it is important to realise that no
To return to my Rip Van Winkle metaphor, we are
bank is alone in this. The current landscape and the legnot guilty of sleeping through
acy issues are impacting every
the revolution, but we may
transaction bank.
have been a little too liberal
For more information, please contact:
with the snooze button in the
How do transaction banks avoid
past. That said, we still have a
sleeping through the revolution?
critical role to play as part of
The change is bedding down
the change and we cannot go
on the entire financial services
through it alone. Let’s not asindustry and no one player,
sume that this revolution we
be it a bank or a FinTech, can
[email protected]
are living through has only
face it alone. While the current
one inevitable outcome.”
landscape increasing for banks,
platforms such as AliPay, signalling that other areas of
a bank’s overall revenue mix will be challenged as these
players venture into money market funds, lending and
other areas of banking services.
NOVEMBER 2016
39