Transaction banking facing technological disruption from fintech

The transaction banking scene is facing increased competition as local banks move into the space, while cross-border activity from tech firms ramps up. New technologies, such as distributed ledgers, are set to significantly reduce the cost of transactions. Incumbent providers continue to be in demand, however, with clients keen on relationship management as well as bespoke solutions to their unique requirements.

The transaction banking sector faces considerable disruption risks. New technologies, such as distributed ledgers, mean that companies may be able to achieve outcomes more efficiently; however, non-banking sector players, such as fintechs, may leapfrog banking incumbents to deliver services in the area.

For incumbents, the service area has tended to be less volatile than other forms of banking, while opening the possibility of cross-selling products and services. Meanwhile, returns on equity in the segment have remained strong – with some banks reporting margins of up to 20%. To better understand the state of play in the transaction banking segment, Bain & Company recently released its report ‘Wolf in Sheep’s Clothing: Disruption Ahead for Transaction Banking’ – focused on structural shifts that may result in winners and losers.Transactional banking has in recent years seen increased attention from global financial institutions, as Citigroup, HSBC, and JPMorgan – among others – have focused on supporting companies with the management of cash and the financing of supply chains. Ten years ago, global banks were the most active actors in the segment, followed by regional players.

In recent years, local and regional banks have increasingly turned their attention to the segment, spurred on by post-crises conditions that shrunk revenues and profit margins in other areas of their businesses. As such, competition has heated up, with local banks providing more tailored services to domestic SMEs, while global banks continue to focus on multinationals and some larger regional corporations.Competition is likely to accelerate, the firm finds, with new product solutions increasingly reaching underserved parts of the market. The past 10-20 years has seen a shift to open accounts and continued focus on traditional trade. However, the new market has seen some cross-border activity from online giants, which are facilitating loans to online businesses, with SMEs in particular able to access such services. Larger banks are seeking to better support SMEs on the one side – as well as supply chain financing – as the market fragments into more specific solutions for specific groups and problems.Traditional players face additional avenues of competition, with cross-border players leveraging expertise in various forms of technology. Many incumbents continue to rely on legacy systems, which can be more cumbersome and do not integrate well with new technologies in the segment, such as distributed ledgers. The shift in technology is likely to see structural decline in the segment, with Bain estimating that blockchain technologies could see prices fall by 50-80%, while making turnaround times up to three times faster.

Receiving and validation applications will also become considerably faster through distributed ledgers, with uniform customs and practices seeing a considerable decrease in completion times. Around 50% of possible distributed ledger transactions will be spent creating transactions, rather than performing them.The shift in technology is likely to impact how many banks operate in the space. Yet while there will likely be impacts on how banks operate in the space, clients continue to see importance in the traditional banking model, largely due to the quality of their relationship management (people still matter), as well as their balance sheet commitment and the availability of products and solutions (many of which are developed in line with the specific needs of clients).

While banking sector incumbents fear disruption from smaller fintech startups, there is also the looming threat of disruption from big tech players. Another report from Bain finds that Amazon could be the third largest US bank within five years, with its strong brand recognition and long-standing digital relationships making it a better bet for success than fintech startups.