Transaction Banking Trends in transaction banking report Survey Report v21

Trends in transaction banking report

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©Finextra Research Ltd.Trends in transaction banking report

While the global financial community continues to struggle back from the economic collapse of 2008, transaction banking has remained one of the few stable areas within the bank. The cash management, trade finance, payments and securities services businesses all experienced low capital requirements, stable earnings and product growth over the past three years. However, a raft of market changes threatens to take the shine off this business. New regulations such as Basel III, Dodd-Frank, the never-ending march of SEPA (Single Euro Payments Area) in Europe, as well as the entrance of new non-traditional payment providers could make 2011 a challenging year for transaction banking.

In order to gain a deeper understanding of how banks are dealing with the current rate of change in the transaction banking business, Misys commissioned an online questionnaire with Finextra Research, the respected information source for the worldwide financial technology community. The aim of the survey, which ran from July until the end of August 2011, was to gather industry views on a wide range of topics – including a look at banks’ strategic focuses, where the major challenges for growth are and what functionality they are adding in online corporate banking.

In all, 121 representatives from banks in 45 countries, ranging from huge global players to domestic financial groups, responded to the survey. This report summarises the findings.

Background

Trends in transaction banking report©Finextra Research Ltd.


3

Reducing IT complexity and reducing costs remain the dominant concerns of transaction bankers in this Trends in Transaction Banking 2011 survey.

• Thetrendamonglargeregionalandglobalbankstoconsolidatetheirproductmanagementand development activities in payments, cash management and trade finance into a central global transaction banking group shows no sign of slowing down. A huge majority of those responding to the survey, 77%, claimed to have “created a transaction banking group combining, at a minimum, cash management and trade finance”.

• “Addingnewproductsandservices”remainedthetopstrategicfocusforbanksmanagingtheir transaction and cash management business over the next three years – gathering 26% of respondents.

• 34%ofthosesurveyedlisted“IncreasingITandsystemcomplexity”asthemajorchallengefacingtheirbank’stransactionbankinggroup.While33%see“Increasingregulation”asthemajor challenge.

• 43%ofallthosesurveyedlisted“Onlinechanneldevelopment”asthetoptransactionbanking priority for next year. This reflects many trends we are seeing in transaction banking at the moment towards the online delivery of cash management and trade finance in a unified fashion.

• Withthegrowthofmobile,itiseasytoseewhy“Real-timepaymenttracking”tookthetopspot in the survey – taking in 25% of those surveyed. Being able to check your payments, in real-time, anywhere, is a real demand banks are seeing from corporates.

• Itisalsointerestingtonotethat“Tradeservicesfunctionality”narrowlybeat“Cashflowforecastingtools”with14%and13%,respectively,confirmingyetagaintheprominentstatus and importance of trade finance in a bank’s service offering nowadays.

• Almosthalfthosesurveyed,45%,describetheirinfrastructureas“Multiplecoreprocessingsystems”, which echoes the interest we are seeing in payment hubs and their ability to help banks centralise and streamline their payment processes when faced with such heterogeneous environments.

• Again,amovetowardssimplifyingprocessesemergesontopinthissurveyoftrendsintransactionbanking.35%ofthosesurveyedlisted“Simplifiedprocessformakingchangesto payment standards and rules across all systems” as their top priority.

Executive summary


©Finextra Research Ltd.Trends in transaction banking report4

The trend among large regional and global banks to consolidate their product management and development activities in cash management, trade finance and payments into a central global transaction banking group shows no sign of slowing down.

A huge majority of those responding to the survey, 77%, claimed to have “created a transaction banking group combining, at a minimum, cash management and trade finance”. Three years ago, just before the collapse of Lehman Brothers, 57% of respondents gave this answer in a similar Misys and Finextra survey on transaction banking.

Despite the obvious growth in banks running central transaction banking groups, questions around consolidation remain. It is one thing to combine the cash management, trade finance and payments groups on the same floor or in one building, it is quite another to ensure seamless integration of operations and back office processes. The cash management business tends to be run by very tech-savvy people, while trade finance attracts those interested in the business of international trade & supply chain. Whether those divergent approaches to the business eventually meet to benefit both the customer and the bottom line is a deeper question.

Please describe your organisational structure for transaction banking services

We plan to create such a group in the near future

We have created a transaction banking group combining at a minimum cash management and trade finance

We have no plans to create such a group and will continue running separate organisations

77%

13%

10%



5

“Adding new products and services” remained the top strategic focus for banks managing their transaction and cash management business over the next three years – gathering 26% of respondents.

The results are not surprising – projects that create additional revenue streams should be a part of any client-facing business. However, these results should be viewed in the context of three other findings.

The following two top responses, coming in at 17% each, included “Rationalising and streamlining back-office systems” and “Reducing cost to income ratios”. Given that 77% of respondents, in question one, said that they ran a consolidated transaction banking business – it is interesting that streamlining back-office systems and reducing costs ranked high on a list of strategic focuses. It wouldn’t be a giant leap to infer that while these global consolidated transaction banking businesses may have had successful business integrations – the resulting IT complexity is an unfortunate consequence of this trend.

Thirdly,threeyearsago,almost39%ofthosesurveyedclaimed“addingnewproductsandservices” as their top strategic focus for the next three years. The significant percentage drop in 2011 to 26% may reflect the complex IT integration issues with adding new business lines.

Both “Expanding into new geographies” and “Primarily focusing on risk management” barely registeredasastrategicfocusonquestiontwo–gettingonly3%ofrespondentseach.The latter is an interesting result as it paints a less gloomy picture in terms of what keeps transaction bankers awake at night: more focus on innovation with new products and services than the wait-and-see approach often associated with a focus on risk management.

What will be the strategic focus for managing your transaction services or cash management business over the next three years?

Adding new products and services

Rationalising and streamlining back-office systems

Reducing cost to income ratios

Attracting more corporate customers

Improving customer service

Expanding self-service channels, such as Mobile orOnlinebanking

Expanding into new geographies

Primarily focusing on risk management

3% 3%

26%

12%

17%

17%

12%

10%



Question three, again, sheds some light on what banks are really concerned about despite a majority claiming a fully integrated cash management, trade finance and payments business and a significant number focused on adding new products and services – IT complexity and regulation.

34%ofthosesurveyedlisted“IncreasingITandsystemcomplexity”asthemajorchallengefacingtheirbank’stransactionbankinggroup.While33%see“Increasingregulation”asthemajor challenge. That adds up to 67% of respondents listing non-market forces as the biggest challenge to their business. This is not a confident position for any industry to be in, never mind banking.

Three years ago, in the 2008 Misys/Finextra Transaction Banking survey, 26% of those surveyed listed IT complexity as a top challenge and 17% listed “increasing regulation”. The rise in those citing regulation is understandable. Post-Lehman Brothers, the shadow of impending global financial regulations has loomed over the entire banking sector.

However, the consolidation of transaction banking, trade finance and even, in some cases, securities services was supposed to create a more streamlined and efficient business culture. Reading between the lines of this survey would suggest that the road to “seamless operational integration” is rocky for most global transaction banking groups.

Despite the analysis of the top challenges, the most striking result is that 15% of those surveyedlisted“Newentrantsofferingtransactionservices”,while13%listed“Dominantglobal banks”. In the 2008 survey “dominant global banks” gathered 20% of the vote, while “new entrants” only managed 5%. The difference in those figures, three years apart, doesn’t require extensive analysis.

What do you see as the major challenges to growing revenue from your bank’s transaction services or cash management business?

Increasing IT and system complexity

Increasing regulation

New entrants offering transaction services

Dominant global banks

De-centralisation of corporate treasury functions

No way of offering international cash management and trade services

34%

3%

33%

15%

13%

2%



7

Almosthalfofallthosesurveyedlisted“Onlinechanneldevelopment”asthetoptransactionbanking priority for next year. This reflects many trends we are seeing in transaction banking at the moment.

Corporateclients,whethertheyareSMEsorlargemultinationals,aredemandingmoresophisticated and innovative products from their banking partners. Individuals, who are used to online banking and mobile access with their retail banking accounts, are now looking for many of the same services from their corporate relationships.

The growth in smart phone, and now tablet, usage is fuelling the demand for these services – especially for low level activities, such as payment authorisation or reporting.

However, that old problem of IT complexity rears its head yet again with question four. “Back officechangetosupportnewserviceofferings”wasrankedasatoppriorityby29%ofthosewho responded to the survey.

Where do your transaction banking priorities lie for next year?

Onlinechanneldevelopment

Back office change to support new service offerings

Dealing with regulation

Other

Reporting i.e. delivering a consolidated view to treasurers

43%

5%

29%

20%

3%



How has the ratio of traditional trade finance, e.g. letter of credit, versus open account transactions changed over the past twelve months?

Traditional trade taking a greater share

No change

Openaccounttakingagreater share

37%29%

34%

The interesting and relatively surprising result here is that “traditional trade finance” takes a greatershareofthetrade&supplychainbusinessat37%ofrespondents,giventhegenerallyaccepted massive move to open account trade and at times how unpopular letters of credit (LCs)arewithpartofthecorporatecommunity.

Not only are letters of credit unpopular, their volumes have remained flat in recent years. It is now estimated that over 80% of global trade is conducted on an open account basis, according to Swift. This shift away from traditional trade finance led to Swift’s launch of the TSU (trade services utility), a collaborative centralised data matching utility, which allows banks to build products around its core functionality to improve the speed and flow of open account trade.

However, letters of credit are still very much in use in emerging market trade and trade in countries where exchange controls are enforced.

It might simply confirm that, with an enduring period of turmoil, the more traditional trade finance tools still have an important role to play and should not be discarded at any bank serious about its transaction banking offering.



9

Do you see demand for financial supply chain services from your corporate customers?

Theseresultsraisesomequestions.36%answered“Yes–andwehaveastandardsolutionto offer them” when asked about demand for financial supply chain services. It is generally understood that most banks do not offer a standard set of supply chain services – given that each corporate client’s supply chain may differ.

However, the results of question six may reflect a new trend in the evolution of supply chain services.

Yes–andwehavestandard solutions to offer them

Yes–andwewouldliketo offer them more than we currently have

No – our corporate customers are not demanding financial supply chain services

36%

9%

12%

Yes–andweareaboutto roll out new solutions

Yes–andwerespondwith tailor-made solutions but don’t have standard products yet14%

29%



This chart is intended to show the top priority for adding functionality for the next 12 months. However, the fragmented results show that many banks are looking to add a range of services to their online corporate banking offerings.

With the ever-increasing demand for instant information, the slow roll-out of faster payment infrastructures in numerous countries and the growth of mobility, it is easy to see why “Real-time payment tracking” took the top spot in the survey – taking in 25% of those surveyed. Being able to check your payments, in real-time, anywhere, is a real demand banks are seeing from corporates.

Itisalsointerestingtonotethat“Tradeservicesfunctionality”narrowlybeat“Cashflowforecastingtools”with14%and13%,respectively.Whowouldhaveimaginedafewyearsago that trade finance would one day gain a higher profile than cash management as a development priority for banks in the development of their corporate offering? This reflects well a trend we are seeing today of greater importance of trade finance in banks’ development of more comprehensive and holistic working capital management solutions for their corporate customers.

What functionality do you plan to add to online corporate banking within the next twelve months?

Real-time payment tracking

Invoice and payment reconciliation

Trade services functionality

25%6%

12%

7%

2%

Cashflowforecastingtools

Information from accounts they hold with other banks

Ability to trade FX online

Information on cash location and amount

Allowing set-up of automated moving/sweeping

Ability to make transfers

Advertising

New entrants offering transaction services

2%4%

7%

8%

13%

14%



11

There has been a lot of press about banks moving to more efficient payment processing hubs over the past few years. However, almost half those surveyed (45%) describe their infrastructure as “Multiple core processing systems”, which tend to be more error prone and cause delays for customers. However, this result may not be surprising given the amount of weight IT complexity has been given in other parts of this survey.

However, the industry has seen a rise in demand for payment hubs. Since many of the respondents say they are looking to reduce operational complexity, that 45% may be looking to centralise and streamline their payment processes when faced with such heterogeneous environments.

How would you describe your current payments management/processing infrastructure?

Multiple core processing payment systems

Centralpaymentsprocessing engine

Payment processing hub45%

34%

21%



Again a move towards simplifying processes emerges on top in this survey of trends in transactionbanking.35%ofthosesurveyedlisted“Simplifiedprocessformakingchangesto payment standard and rules across all systems” as their top priority. “Rapid deployment andreturnoninvestment”followscloselybehindat23%and“Bettermetricsformonitoringservicelevelsandcharges”roundsoutthetopthreeat13%.

Reducing IT complexity and reducing costs remain the dominate concerns of transaction bankers in this 2011 survey.

What are your priorities for improving your payment processing environments?

Simplified process for making changes to payment standards and rules across all systems

Rapid deployment and return on investment

Better metrics for monitoring service levels and charges

35%

6%

13%

10%Protect investment in existing systems

Enhance ability to track payments as they pass through your systems

Improve quality of outgoing messages

13%

23%



13

Appendix

Participating companiesAbsaCapital

African Development Bank

Aktia Bank

ANZ

BancoCAM

Banco Popolare

Banco Security

Bank Bemo Saudi Fransi

BankCentralAsia

Bank Muscat

BankofCyprus

Bank of The Philippine Islands

Bank of Tokyo Mitsubishi

Bankia

Barclays Bank

BBVA

BNP Paribas

BNP Paribas Fortis

BankofNewYorkMellon

BPPR

CentralbankofTunisia

Citi

CommercialInternationalBank

Commerzbank

CommonwealthBank

CreditSuisse

DBS Bank

Deutsche Bank

FirstRand

Handelsbanken

Hellenic bank

HSBC

ING Bank

Intesa Sanpaolo

Islamic Development Bank

J.P. Morgan

Jordan Kuwait Bank

Jyske Bank

KeyBank

Kleinwort Benson

Macquarie

MBFCards

MizuhoBank

Morgan Stanley

National Australia Bank

Natixis

Nedbank

Nordea Bank

Nova

OP-PohjolaBankGroup

OrientalBankOfCommerce

PKOBankPolski

PNCBank

Privredna Banka Zagreb

Prominvestbank

Rabobank

Raiffeisen Bank

RenaissanceCapital

Royal Bank of Scotland

SA Reserve Bank

Scotia Bank

Sharjah Islamic Bank

Siddhartha Bank

Standard Bank

StandardCharteredBank

StellarOneBank

Sydbank

Syndicate Bank

UBS

UniCredit

Unicredit Bulbank

Union Bank

VTB Bank

Wells Fargo

YBS

The following banks and job titles from the following 44 countries responded to the survey. Individual responses to the survey remain anonymous.



Head of IT Department

Head of Market Infrastructures

Head of Marketing

Head of Marketing & Innovation

HeadofOperations

Head of Payment Infrastructures

HeadofPaymentOperations

Head of Payments Industry

Head of Payments Infrastructure

Head of Product Development

Head of Retail Strategy

Head of Strategy, Transaction

Services

Head of Strategy, Global

Transaction Banking

Head of Transaction Banking

Head of Transaction Services

Head, Global Payments FI Asia

Head, Financial Institutions

Head, Settlement & SWIFT

Director,InternationalOperations

ITChiefManager

IT Manager

ITProjectCoordinator

Manager

Manager

Manager, Integration

Manager, IT Application

Management

Manager,HeadofSalesPCM/FI

Manager, International Payment

Services&CashManagement,

CorporateDivision

Managing Director

Managing Director, Head of

Transactional FX

Marketing Manager

MD

Head, Payment Processing

Payments Manager

President

PrincipalTreasuryOfficer

Product Manager

Product Manager, Money

Job ProfileAssistant General Manager

Assistant General Manager,

CMS

AVP

ChiefOperations&Information

Officer

CIO

ClearingRepresentative

DeputyChairman

Design Manager

Development Manager

Director

Director,PaymentCentral

DirectorofeChannels&

Payment Solutions

Director, Business Development

–CorporateSales

EVP

Executive Director, Global

Market Infrastructures

Executive Manager

General Manager

General Manager, Transactional

Banking

GlobalCashManagement

Global Network Manager

Global Program Director SFS

Technology & SVP

Global Relationship Manager

Group Head of Payment

Services

Head–EPMO

Head – Electronic Payment

Systems

HeadMSGofOps

Head of Asset Servicing

Operations

Head of Business Services

HeadofCardServices

Management

Head of Global Markets

OperationsandIBC

Head of GTS

Head of International Payments

Appendix continued

Transmission,PCM

Programme Executive

Quality Manager, Payments

Relationship Director

Relationship Manager

SalesManagerCash

Senior Business Development

Manager

SeniorConsultant

Senior IT Manager

Senior Manager

SeniorManager–Online

Payment Solutions

Senior Manager (IT)

Senior Manager IFI &

CorrespondentBanking

Senior Project Manager

Senior Relationship Manager

Senior Vice President

Senior Vice President, Head of

Intern. Payments

Strategic Analyst

Strategic Planning Analyst

SVP

SVP & Manager

SVP Product Management

Technical Services Analyst

Treasury Department

Treaury Manager

Treasury Services Head of FI

Sales Western Europe

Vice President

VP

VP Market Infrastructures

VP Market Management



15

Participating countriesAustralia

Austria

Belgium

Bulgaria

Canada

Columbia

Croatia

Cyprus

Denmark

Egypt

Equador

Finland

France

Germany

Hong Kong

India

Indonesia

Italy

Japan

Jordan

Kuwait

Malaysia

Nepal

New Zealand

Nigeria

Oman

Phillipines

Poland

Puerto Rico

Russia

Saudi Arabia

Singapore

Slovenia

South Africa

Spain

Sweden

Switzerland

The Netherlands

Tunisia

Turkey

Ukraine

United Arab Emirates

United Kingdom

USA

Appendix continued

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MisyswasformedbythemergerofMisyswithTuraz,whichincludestheaward-winningKondor+productline.Combinedtheyareabletoaddressallcustomerrequirements across both the banking and trading book businesses. Misys is the trusted partner that financial services organisations turn to for help solving their most complex problems.

Find out more at www.misys.com

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All rights reserved.

About FinextraFinextra (www.finextra.com) is the leading independent newswire and information source for the worldwide financial technology and banking community.

Finextra publishes the most important and up-to-date technology, operations and business news, features, blogs, analysis, videos and webcasts from the capital markets, investment banking, retail finance and corporate banking sectors. This information is accessed by more than 165,000 monthly users from global financial services institutions on www.finextra.comand via free newsletters.Finextra runs Finextra@Sibos (www.sibosonline.com) the official Sibos exhibition news portal and has a portfolio of industry events covering Euro payments, post-trade services, social media and mobile financial services.

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Transaction Banking Trends in transaction banking report Survey Report v21