Transaction banking facing technological disruption from fintech

16 July 2018

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.Transaction bankingTransactional 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.Product diversificationCompetition 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.Automation through distributed ledgersTraditional 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.Relationships prevailThe 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.


Payments market projected to see 6.6% annual growth to 2027

17 April 2019

Bank payment systems are big revenue generators for incumbent banks, and growth in the segment is projected to continue at a rapid 6.6% annual increase, from $1.3 trillion in 2018 to $2.4 trillion in 2027. Developing markets are set to see the fastest growth, increasing their total share from 52% to 61% in the same period.

The payments segment is set to see strong growth in the coming decades, particularly in developing countries. The long-time control of banking incumbents over the segment, however, faces various threats from the rise of fintechs leveraging a range of technological innovations.

To understand the changing market conditions, as well as the possible impact of new entrants, Boston Consulting Group (BCG) has released its “Global Payments 2018” report.Payments revenue is expected to grow by 1.1 trillion to 2027Payment revenue has seen a number of years of solid growth, particularly in line with developing global economies. Compound annual growth rate (CAGR) globally stood at 6.8% between 2010 and 2017, increasing from $805 billion to $1.27 trillion. Mature markets have been relatively stable, with growth of around $100 billion noted during the period, resulting in around $616 billion in revenue in 2017. Developing economies, meanwhile, saw total revenue more than double, from $268 billion to $657 billion.

While the disparity in growth between developing and mature economies is currently stark, the firm’s projections for the future will see developing markets up their growth while mature market growth slows, at 8.3% and 4.4% CAGR, respectively, between 2018 and 2027. Developing market revenue shares are overall set to continue to eat into mature market shares. The shift will see the 2027 mature market represent 39% of total revenues, compared to a 48% share 2018.Primary income set to close gap on secondary income in mature marketsThe study also examined the difference between primary and secondary revenue sources, and their respective growth rates. Primary sources represent transaction fees that come with making payments, while secondary sources represent account fee costs and related non-transaction costs. The study revealed a shift toward increased income from primary sources in mature markets, with the share between primary and secondary sources shifting from 43% and 57% in 2017, to 57% and 43% by 2027. In developing markets, however, secondary sources are and will continue to be the main source of revenue growth, at 27% (primary) and 73% (secondary) by 2027, with only a 4% increase in income from primary sources over the same period.Retail payments revenue is expected to growRetail growth is projected to represent the more lucrative growth market for payment revenues, with 7% growth between 2017 and 2027. Credit card revenue will see the strongest relative growth, up almost $462 billion, followed by account revenue and debit card revenue. The retail market, meanwhile, is set to top $1.85 trillion by 2027, with the wholesale market set to see growth of around 6%. Account revenue will see the strongest absolute growth, while credit card and debit card revenue growth is set to outpace the market as a whole, with around 7% growth during the period.

The firm notes, however, that customer sentiment is changing. Fintechs are sometimes able to provide more efficient and better tailored services – with uncertain outcomes for some incumbents. “In both the retail and wholesale payments business, customers are becoming impatient with clumsy interactions and inefficiencies,” Mohammed Badi, leader of the firm’s global payments and transaction banking segment, and the report's coauthor, said. “Consumers, treasurers, and merchants are looking for automated, integrated buying journeys and tailored service. They are being conditioned by their buying experiences in other industries. Banks, in order to stay relevant, must respond faster and more strategically to the altered payments environment by focusing on the pain points that matter most across the overall customer journey.”